I find myself highly intrigued by this topic. As a leader in a design agency that regularly initiates startup style offshoots and venture’s into new market niches this looked like just the thing we had been looking for. Most of us have heard of rewards based crowdfunding platforms (CFP) such as kickstarter but did you know there were different types of Crowd funding platforms with entirely different approaches to sourcing of funds.
BENEFITS OF CROWD FUNDING
- Crowdfunding democratises investment reducing cost for your organisation to solicit money for your projects.
- It also solicits visible investment. You can see who they are and what they are interested in!
- Big potential to eliminate the ‘old boy’ network and enable a new class investors!
CFP Platform types
Reward-based crowdfunding is based on ‘donations for gifts’, where funders give money to activities in return for rewards or first chance at the product being produced.
Platforms include:
www.indiegogo.com
www.kickstarter.com
Equity-crowdfunding, rather than donate money, funders invest money in an activity and, in return, receive shares or equity.
Platforms include:
https://www.squareknot.co.uk
https://www.seedrs.com
https://www.crowdcube.com
Donation or charity based crowdfunding or crowdfunding for good is based around the idea that people like to give to charity but at the same time have a clear choice who they wish to give to. It’s based a little more around the micro-financing model developed by Muhammed Yunis and Grameen Bank to battle poverty in the emerging world.
Platforms include:
www.kiva.org
www.giveforward.com
Loan based Crowdfunding enables investors to get a set ROI as long as they can trust the business will do well. This is the most difficult model as it means expenditure of money for no major gain and now liquidity in the business.
Platforms include:
www.squareknot.co.uk
www.fundingcircle.com
Some key tips:
Do not start cold! Already have an engaged community…. And leverage this interest.
Choose wisely which platform is right for you. Crowdingin is a great platform to lead you through which CFP to use.
CROWD FUNDING IN CHINA
The other area that intriqued me is seeing that we were hearing this lecture in Shanghai exactly how do these platforms relate to China? China does have an almost google like approach to startups in that small innovative products come and go constantly however from a cultural and legislative perspective there are some huge barriers to entry.
First and foremost being that as a culture the Chinese still have an innate lack of trust in giving money to someone they don’t know without ironclad guarantee’s which at this point can not easily be given.
Yule Bao is perhaps the start of this as it has the backing of a large insurance corp who holds/guarantees the money. Of course this is dealing with sums of money at a small scale (100RMB per transaction) but if China is to venture into more robust Crowd funding models such as equity based CFPs then there needs to be more than just a large insurance provider backing these transactions due to the potential figures involved.
There are also many Governmental rules and hoops to jump through. Currently there are laws in China such that sees artists obtaining grants from the Government for their art however the Government has the right to sell their artwork or prints/copies of it online with out any breach of copyright. Why then would the government allow a Crowd Funding platform to exist without maintaining a similar interest and would this be welcomed by the general populace. i.e. Every interest you buy in a company the Govt gets a share.
Furthermore a regulatory vacuum has blurred legal boundaries for Internet financing in China. The CBRC is leading research on how to regulate peer-to-peer lending and it is unclear if equity crowdfunding is considered ‘illegal fundraising’ and an illegal means of raising capital. Chinese law does not allow unregistered companies or individuals to sell stakes to the public. The millennial Chinese are more much more comfortable than their predecessors in terms of online purchasing however there needs to be an alignment with Govt legislation and banks or a similar support system. I can see a couple of ways that CFPs may work in China: the first being to leverage foreign investor interests and open up the Crowd Funding platforms in China to foreign investors. This is already of key interest to the Chinese government and of course entrepreneurs so if the laws could be ironed out to allow for this then it could be a step in the right direction and help pave the way for leveraging in the big growth market ‘Chinese Millennials’.
The thing that is really interesting is if you believe Jack MA’s last speech as Alibaba’s CEO then there is great interest from the new Chinese to see small business sprout up and succeed ‘small businesses are where most of the Chinese dreams live. ‘
With the right mix of backing most likely from a large connected organization and guarantee’s/governmental legislation to protect the consumer this could be a whole new world of innovation and leadership into the 22nd century for China. The future is laid out and wide open for the taking! *
APPENDIX/NOTES:
*Jack Ma Last speech http://www.techinasia.com/alibaba-jack-ma-last-ceo-speech/
YULE BAO (Ali Baba) – Pilot program.
Users can invest money in a range of projects for games, movies and TV shows. Users could only invest 200RMB over two projects and that was it. Definite drive towards content based funding. i.e. films etc.
Chinese law does not allow unregistered companies or individuals to sell stakes to the public so the law is slightly murkey and possibly illegal.
China does have very weak intellectual property protection in China which dissuades people from posting their ideas online!
Shanghai Free Trade Zone – Opportunity to set one up as currently outside of the regulatory system. A physical piece of land in Shanghai where China and companies can experiment new types of trading that is outside of the Chines laws. A CFP would be a perfect place to test this out!
REWARD CROWD FUNDING
Kickstarter projects with actual products are of more interest on this platform and effectively becomes a point of sale service.
Kickstarter funded 323million worth of Arts Projects. (Take 7.5%)
Spike lee got 1.4million.
Veronica Mars movie Big backlash regarding this.
Oculus Rift – Funded on Kickstarter and now sold the business to Facebook for 3million.
EQUITY CROWD FUNDING
UK is the only place that has full regulation of the ECFPs. UK govt legislated to allow anybody to be an investor. Before that you had to be an accredited investor. No where else in the world is this allowable.
US there is the JSBS Jump Start Business Startups law. At the moment they still have not got clarity on who can become and investor. What are the criteria to do this. They want ot be very careful that 1. There is no fraud but also they do not want a Gambling mentality for any old person. There must be a selection criteria. Also should there be a limit to how much of your overall net worth you can invest in business. At the moment in the US you have to have a net worth of 1million.
Art Sectors – Maintaining control is really important.
SEEDRS– The company dictates what benefits you have for different levels of equity. Mainly focused on internet startups. Art projects not overly successful. However there has been now a case where a West End Musical has been successfully funded. Offered Under 9% equity and made over £200,000.
When you log in you get all the details of the financing it is visible and transparent. Previous Success for the project prior to CF so a certain amount of kudos and press.. Good to consider this when interested in going to CFP.
CROWDCUBE – CC actually keep the company shares and
SLATED– US based Equity platform. It’s a marketplace for making films happen. They can only advertise to potential investors then if there is interest the discussion is taken offline and go through the due diligence and paperwork.
SOURCE: WORLD BANK ‘Crowdfunding’s Potential for the developing World’ 2013.
Other SOURCES:
http://crowdfundcapitaladvisors.com/worldbank
Crowdfunding as a business model: