Crowdfunding is a way for people, businesses and charities to raise finance.
It works by individuals or organisations, investing or donating to Crowdfunded Projects in return for a potential profit or reward.
Investing in this way can be very risky.
The Golden Rule – Only invest money you can afford to lose.
If a company or person wants to raise some money for a project, they can post all the details on a crowdfunding site.
Raising funds in this way, avoids having to go to the bank.
The ‘Crowd’ in ‘Crowdfunding’ refers to the people or organisations who provide the money, by ‘investing’ in the project.
There are 4 Main Types of Crowdfunding:
1 Investment Based Crowdfunding:
You invest in a business and receive a stake in return, usually in the form of shares.
2 Loan Based Crowdfunding:
You lend money to the individuals or companies, in return for a set interest rate.
This is also called, Peer to Peer or Peer to Business lending.
Investment Based and Loan Based Crowdfunding are regulated by the Financial Conduct Authority. (The FCA). The FCA is the UK Regularity body for all financial matters
3 Donation Based Crowdfunding:
You donate money to a person or charity with NO expectation of anything in return.
4 Reward Based Crowdfunding:
You give money to the project in return for a reward that is linked to the project or cause supporting it.
How does Crowdfunding work?
If you visit a crowdfunding website, you will be able to see an overview of the projects being pitched.
Popular crowdfunding websites are Kickstarter / Indiegogo / Crowdfunder etc. Projects are also promoted all over Social Media.
If you find a project you are interested in, you will need to look for more details.
The business or individual that’s looking to raise the money, will usually tell you:
Ø How much it wants to rise.
Ø How much it has raised so far.
Ø The share of the business offered (if relevant).
Ø What the money raised will be used for.
Ø How long the pitch is open for. (Usually 30 days)
Ø How many people have already pledged funds.
Ø What you will receive in return for investing.
The investment can only go ahead if the campaign raises the full amount required.
You should also have a 14-day cooling off period. (Not always)
Risks:
The Golden Rule – Only invest money you can afford to lose.
Crowdfunding is a new(ish) concept and investing in a new business is always risky.
v The business you invest in might go bust. Many businesses fail in their first few years, so you could lose all your investment (money).
v The return is not guaranteed.
v It may be hard to sell the shares, or they may be well overpriced. (Investment style Crowdfunding).
v The Crowdfunding Platform may go bust.
The Golden Rule – Only invest money you can afford to lose.
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Reward Based Crowdfunding:
This is probably the best known type of crowdfunding.
Reward based crowdfunding involves individuals contributing comparatively small amounts of money to projects in return for some kind of reward.
The size of the reward is usually a reflection of the amount contributed. The larger the amount pledged, the greater the rewards. (Goodies).
Rewards can range from something simple such as a Thank You card to a production version of the crowdfunded project.
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Platforms:
§ Kickstarter:
The best known of the crowdfunding platforms, it is also the largest, with funds raised to date of over $3.67bn USD. It was launched in 2009, and on their ‘All or Nothing’ scenario over 36% of all projects are successfully funded.
§ Indiegogo:
Flexible funding, $1.15bn USD raised to date.
§ Crowdfunder:
UK based, launched in 2014. Raised over £40m GBP
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REMEMBER:
There are 2 things you must understand about Crowdfunding:
All projects take twice as long as their projected timeline, and they always cost twice as much as the amount budgeted.
Only ever invest money you can afford to lose.