The Daily Prosper
Crowdfunding: When to resort to collaborative economy

Crowdfunding: When to resort to collaborative economy

Crowdfunding has erupted within the past few years as an alternative form of financing. It has advantages… and also some dangers.


The irruption of new information technologies has resulted in changes in the economy that we could not even imagine a few years ago: for example, the possibility to take forward a business idea, an artistic idea, a solidarity initiative, or any other type of idea obtaining the economic support of a large group of small investors instead of a few large ones. This is what has come to be known as crowdfunding.

This tool is experiencing a major boom: in the four years between 2012 and 2015 the money obtained through this method by individuals and companies grew as much as 1.000%.

Just to get an idea of the volumes that we are talking about, Kickstarter, one of the largest crowdfunding platforms in the world, has already obtained more than 3.200 million dollars for about 130.000 projects which have been financed by more than 13 million sponsors.

 

What is it?

Using an English word such as ‘crowdfunding’ might sound strange or even unpleasant for some. Sometimes it is translated into Spanish as ‘micromecenazgo’ (‘micro-patronage’) or ‘financiación colectiva’ (‘collective funding’), but the truth is that the English word is prevailing, as it happens with so many economic terms.

If we try to define crowdfunding with a sentence, we can say that it is a funding method by which it is possible to pay all kinds of projects through micro-credits given by a large number of individuals or small investors.

It is a way, therefore, to obtain money through an alternative means other than the common ones, and which allows an elasticity that bank financing not always can provide. For example, it can be the solution for projects that, due to their nature, could not easily have access to a loan; and in many occasions, it allows to obtain amounts that are rarely obtained through the most common funding channels.

"Crowdfunding wich initially was born very much linked to artistic or creative projects, crowdfunding can be also interesting for SMEs"

How does it work?

As we were saying, crowdfunding can be achieved thanks to the new technologies, which have allowed the emergence of numerous Internet platforms where the people in charge of a project request the amount of money they need to carry it out. In addition, social networks are also used to advertise their campaigns.

In most of the projects, the donations can be as small as a single euro. Usually there is the possibility to make donations at different levels to which different rewards are linked, which can be pecuniary or not, depending on the type of crowdfunding that is being carried out.

The variety of proposals is almost infinite, and every day more and more platforms offer means by which the investor is going to obtain an interest for his money, but what is most common nowadays is to obtain the product that is going to be created or manufactured with more extras as the contribution increases.

An important key to crowdfunding is that the time to gather all the capital is always limited. Thus, the money of the potential investors is not trapped without a clear final horizon. If by the established deadline the 100% of the requested amount has not been reached, the amounts provided are returned to the contributors and the project is postponed or cancelled.

 

When can it be used?

Crowdfunding can be used at different times during the business or creative process, but it is usually utilized to achieve a leap forward that otherwise could not be achieved: to start manufacturing a product, to start a creative work…

In addition, so far, the most common proceeding is to launch a crowdfunding campaign when we can obtain a result that we can offer to the sponsors, which in many cases will take us necessarily to the final stages of the business process.

 

For what sort of projects?

Crowdfunding was born very much linked to artistic or creative projects. As a matter of fact, it is considered that the first campaign that can be considered as such was the one carried out by the rock band Marillion, in 1997, to finance a tour. Based on that idea, the first initiatives to create crowdfunding platforms were also geared to the artistic and cultural areas.

In fact, something of that original spirit still remains in some platforms, as the already mentioned Kickstarter, where we can find art projects, comics, dance, design, fashion, cinema and video, music, photography, publications, theater projects and also parallel fields, such as technology and journalism.

Nowadays, however, crowdfunding has spread to numerous business sectors and, in fact, many specialized platforms have arisen in certain economic sectors or in some types of companies.

Some of them, such as Filmarket Hub, are conceived for audiovisual projects; others want to promote scientific projects, such as I Love Science; social projects are also considerably successful through platforms such as Social Impulse… Even in areas where we would not think too much about using crowdfunding, ideas are being developed with success, as it is the case of Housers in the real state market.

Crowdfunding can be also interesting for SMEs, which are the object of several platforms offering funding in exchange for shares –it is the case, for example, of Crowdcube– , or simply as loans –such as crowdlending from Comunitae– or even as advance payments on invoices or promissory notes, as it is being done by Finanzarel.

 

Is there any danger?

Of course, not everything are advantages when it comes to crowdfunding and, as a matter of fact, there are issues that the businessman or the creator –especially the former–  must think through before making sure to be financed this way.

According to the experts, one of the dangers is the great amount of information that must be shared about the product or idea, normally at a stage where you would need more time to take such idea or product into the market and, as a result it could be stolen.

Another problem is that a lot of information is also shared about the company accounts status, especially if an important funding round is successfully completed, which also presents a risk of exposure to potential cybercriminals.

Furthermore, we need to take into account that, as any other expanding activity, crowdfunding can lead to deceptions, with false sites or front companies. It can also result in projects that fail, leaving your own idea bogged down. As in everything that has to do with the business environment, choosing the appropriate partners to start a crowdfunding will be, therefore, essential.