Considering crowdfunding? Burst the bubble first!

It could fund your project, boost our companies, create jobs and maybe even save our entire economy: crowdfunding. Advertised as the go-to digital cash machine if the bank doesn’t get you the money you need, crowdfunding is hard on its way to become a major hype. But is it right to push crowdfunding as the answer to your finance, marketing and user experience-needs? No. In fact, each type of crowdfunding has its own specific bubble to burst before you get started.

Donations – and reward-based crowdfunding

If you know what crowdfunding is, you’re sure to know about Kickstarter. Right now, Kickstarter is only available to U.S. and U.K. entrepreneurs but there are lots of alternative platforms where you can subscribe in order to pre-sell your product.

Consumers on the one hand experience the platform as one where they can either be an early adaptor where they are the first to purchase the product, or where they can choose not to receive anything in return for their financial contribution. In the latter case, they are a donator. For the entrepreneur it means that often the product has to be fully ready for production. Entrepreneurs that only have the idea but still need to get from initiation to first (prototype) production, might experience some difficulties as their campaign might not catch flight.

Peer-to-Peer lending

Lending is big. It’s easier for the consumer (lender) to understand. But it’s also suitable for the more experienced crowd that understands the risks of giving away money to a startup that might not be able to pay it back later. Often, the lender is confronted with different cases, each provided with their own “risk status” in order to give them at least some guidance and understanding of the risk they’re taking.

If you are considering peer-to-peer lending, it’s wise to follow what the banks’ policies are. Though they are often accused of being impersonal and “only looking at the numbers”, there is a reason why restrictions like Basel 3 have been developed. Additionally, banks have reason to amortize EUR 50K- loans: en masse. If you are one of the entrepreneurs that understands this but who is being disadvantaged due to regulations, then peer-to-peer lending could work for you. Remember that you’ll have to pay it back with interest, and sometimes you’ll be severally liable for the entire borrowed sum of money. Societyone in Australia is an example of this type of crowdfunding.

Equity-crowdfunding

Equity-crowdfunding is a tough subtype that demands some explanation. It’s not easy for the crowd to understand that valuation is key in this process and how they will benefit from this. Generally, as a shareholder, you’ll receive profit either by an increase of the value of the shares you’ve bought, or because you receive revenues or dividends. A combination of these profits is possible. This is about everything that the majority of the crowd is interested in. However, the larger the investor, the more likely he will inquire about your financial data, you as a person, the strategy you choose, etcetera. One example of a CAPS-accredited equity-crowdfunding platform is Symbid situated in The Netherlands.

For the entrepreneurs it’s good to know that the higher the investment, the higher the amount of involvement generally is. Also, the solvability of a startup is increased as funding via selling your company is considered as equity. In the past, this has also led official lenders such as banks to reconsider loan application. In fact, traditional institutions like banks, subsidy advisors or governmental bureaus, are more often referring entrepreneurs that they cannot help immediately to crowdfunding platforms. The message? If you can make it with crowdfunding, you can make it anywhere.