Crowdfunding: Is It worth the Effort?

As seen in the latest issue of Master Investor Magazine

Business is on the move. There’s no doubt about it. From hotdesking, to the Social Stock Exchange, to increasing social awareness and accountability, the future of entrepreneurial business for Millennials seemingly lies in business driven by communal social initiatives. With collaboration on the web providing an opportunity for exponential growth, starting a business has never been so exciting. No longer does it necessitate a one-man-band startup hidden behind a laptop with seemingly no way to make it out of your home office. Now, the power of the masses is at your fingertips, where collective ideas, resources and strategies can be readily tapped into by the budding entrepreneur.

There are, of course, still many challenges and big decisions to consider before starting out, but one of the fastest growing ways for startups to get a boost is crowdfunding. Everywhere you look, there are exciting crowdfunding opportunities for the well informed and the forward thinking. Crowdfunding was recently catapulted from relative obscurity into the mainstream when Facebook bought Oculus VR, a successfully crowdfunded tech product, for $2bn, which according to Zuckerberg ‘is just the start’ of a 3D visual platform revolution. So the successfully crowdfunded project can bare enormous fruit. According to Forbes, 2014 saw $16 billion crowdfunded, with that figure estimated to grow to over $34 billion in 2015. In 2016, the crowdfunding industry is on track to account for more funding than venture capital. So what exactly is crowfunding, and is it all as it’s cracked up to be?

Crowdfunding is an innovative way to virtually collaborate on a project’s funding or even purchase equity in a startup. It has great appeal to those inspired by the ingenuity of the startup community but frustrated by financial barriers. Crowdfunding can help early stage companies establish a network of investors while securing capital, whether it’s through acting as matchmaker between startups and investors via a trading platform, or acting as an online community for peer-to-peer or social lending. Essentially, investors are able to discover, fund and support businesses that they believe in, and strong companies are able to seize an opportunity to grow, develop and succeed.

There are essentially three main types of crowdfunding: equity (giving part of the long-term value of a company), reward (incentivising funders with special rewards), and debt (donating to a business or project in exchange for a financial return and/or interest at a future date). The idea of crowdfunding is not new, with well-known sites such as Kickstarter in the US initially becoming popular by allowing individuals the opportunity to promote their project in exchange for rewards; but we are certainly in a new phase of this alternative finance movement as the power of the crowd – something that has great appeal to socially conscious and communally committed Millennials – takes on a new level. After all, it is the input of individuals in the crowd that triggers the crowdfunding process and influences the ultimate value of the offerings or outcomes of the process. From Colony88, a creative startup supporter in Hong Kong; to Crowdrise, a fundraising site for charitable causes; to Crowdcube, one of the stars of the UK scene: this new wave of funding ranges from individuals becoming shareholders contributing to the development and growth of the offering, to those playing a donor role oriented towards social projects.

For Millennials looking to engage in this entrepreneurial people power, there are clearly benefits. Crowdfunding offers businesses the chance to test the market and see how popular something is going to be before a large-scale operation is set up, and any glitches can be ironed out early on. Given that individuals act as agents, selecting and promoting the projects in which they believe, the process gives a great indication of the lie of the land and the market. There is an organic spontaneity throughout. As the ball gets moving, crowdfunding creates hype as social-media-proficient Millennials come on board and disseminate information about projects they support in their online communities, and so share the product even before it’s launched. The pressures of getting traditional investors on board can be tough, and this often presents huge stresses and strategic conflicts. Here, you’re not tied to one investor, or in fact any investors in the true sense. Crowdfunding is merely people buying your product on various different levels; and those who pay more receive more acknowledgment.

So crowdfunding undoubtedly presents startups with an interesting and creative option, but with so much out there, it’s clearly also important to be mindful of a few things. Choose your crowdfunding site carefully and be sure to check out what fees are involved. It all depends on your product or ‘offering’. In some cases traditional investors may suit your business best. They offer their expertise and advice to start-ups, who, in some cases, can be young, inexperienced and in need of guidance. These investors then have a vested interest in the company, so if it loses its way, they can assist and get it back on track, as they want to protect their investment. Crowdfunding doesn’t offer any ‘real’ investment or risk from others – with many startups offering products as low as £5-10 for basic investment.

But cautions aside, it is difficult to ignore the pull of such a powerful communal economy. Large companies (even listed ones) are also using crowdfunding for smaller side projects as a means to test the market. Marvell’s vice president Peter Hoddie raised a $52,000 campaign to attract 500 backers to test its new Kimona Create software and hardware tool kit. It speaks volumes if the everyday person is willing to pay $599 to a company which last year reported profits of $3.4 billion. Hoddie believes it to be much more valuable than a survey or focus group, and if people are willing to vote with their feet in such a positive way, it must signal accuracy in the product’s future saleability.

Perhaps the most exciting aspect of crowdfunding, though, is that is has opened up the world of business and has changed the goal posts in the process. There is an array of exciting alternatives out there, and many crowdfunding websites are not targeting the likes of Marvell, but the individual start-up – the Millennial. For example, Peerbackers, is consistently recognised as one of the top crowdfunding websites in the industry, focusing on funding entrepreneurs and innovators; and Endurance Lending Network provides a platform that connects small businesses looking for up to $500,000 of debt capital. From businesses to the individual, there are options. Millennials struggling to get a foot in the housing market will be especially keen to hear about Fundrise. It’s real estate, but not as we know it. For those who can’t afford a property of their own, Fundrise offers a company in which anyone can buy shares in order to own part of a property. These ‘shareholders’ earn from both rent and capital gains, and it gives them the same opportunities that owning their own home would, but on a much smaller scale for those who can’t afford to buy on their own. In a time when buying a property is becoming less and less attainable, this is an opportunity for everyone to get on the ladder, albeit by investing in one piece of the ladder at a time.

What’s appealing to our generation is that crowdfunding doesn’t have to be solely about making money simply for profit’s sake. It can also be raised for altruistic purposes. DonorsChoose has raised $225 million for more than 400,000 classroom projects – from buying classroom dictionaries to funding field trips. The academic crowdfunding site Experiment assists in the much needed area of research funding. Here, scientists approve every project before they go live on the site, which allows researchers and scientists to propose their projects directly to the people who care about their field. Rather than gaining anything physical, campaigns share progress with donors as thanks for their monetary support. RocketHub too gained traction in the sciences with its annual SciFund Challenge, an online effort to fund science projects. On a similar level, Unbound provides an alternative to the frustrations of the publishing industry, where authors pitch an idea and potential readers pledge money to fund its writing. It is both a funding platform and a publisher; the site splits a book’s net profit 50:50 with the author.

There are, of course, many out-of-the-ordinary crowdfunding opportunities worthy of consideration. With environmental factors never far from the thoughts of many Millennials, Spacehive is a funding platform for communal projects and public spaces. The site offers a list of projects, from new parks to playgrounds, towards which people can pledge money. Like Kickstarter and many others, money is only taken once the total funding target has been reached. And for all those Millennials with one eye on the future, Project Get Old is a programme led by Pfizer, in partnership with Indiegogo, based on the idea that age doesn’t have to dictate health. Pfizer’s goal is to showcase and garner support for as many projects as possible that improve quality of life as we age.

So crowdfunding, if maximised, can offer something for everyone. Whether you have a charity project or a business idea, crowdfunding can be used to help turn your entrepreneurialism into reality. Crowdfunding, or collaborative funding via the web, is one of the standouts for growth in our evolving collaborative economy. Its potential for exponential growth is exciting, but so too is the communal power of the crowd. Crowdfunding provides an opportunity to be part of a great idea, and as the tag line of crowdfunder.co.uk highlights, ‘Behind every project is a great story’. It is this personal touch, this social awareness, this engagement with the community that drives so many new ideas from Millennials. In crowdfunding, there is the potential for all this and more.