By Kristine Pontoppidan - NinjaConsult
Already disrupting the global finance sector, crowdfunding is predicted to overtake venture capital as a source of finance for startups and SMEs. A flexible and convenient solution for many startups and companies, crowdfunding is one of the most interesting financing tools right now, and the economic potential for SMEs is almost endless.
But while a democratising force in enterprise finance, crowdfunding it is not a quick capital fix and it is certainly for everyone.
Here is a beginner's guide to the four main types of crowdfunding:
The nature of donation-based crowdfunding is often altruism, where the crowd donates money to good causes without getting anything in return. This is a fantastic boon for NGOs and charitable projects.
Reward-based crowdfunding is perfect for startups with a B2C product and is probably the most well-known type due to global platforms such as Kickstarter and Indiegogo. There is a huge potential in using reward based crowdfunding to get your product validated by the crowd and to get that initial funding for the first production. Reward-based crowdfunding isn’t easy money; it requires time and resources to make a successful campaign, but there is plenty of help available if you want it.
In lending-based crowdfunding, the crowd will lend money to a person or a company and in return get interest on that loan when it is payed back. Whether you are a company or an investor, be critical before you choose a platform! Do they have an approval from the national financial authorities? Do they have a track record of providing funding? Reach out to other companies who have used the platform and ask about their experience! How are lenders positioned if a company can’t pay them back? Do your homework and choose wisely.
Finally, equity-based crowdfunding, where companies sell a share in their company to a crowd of investors. Equity based crowdfunding is quite complex both as a financial tool and in how it is regulated. Lawmakers are struggling with this emerging financial tool and how to handle it. There is little agreement at EU level on how to regulate it. Therefore if a business is considering using equity based crowdfunding, getting help and advice from the platform of its choosing and their lawyer is essential.
If you consider using crowdfunding my key advice is: to explore the market, ask other companies about their experiences, talk to your local crowdfunding association, ask people like me. Crowdfunding is very much about sharing knowledge. Don’t re-invent the wheel; someone has already done that.
Remember: The Future Belongs to the Crowd!
NinjaConsult is a small consultancy which specialises in helping businesses and regulators navigate the crowdfunding space.