The other day I came upon a nice initiative for a study into a method to rid the oceans of the plastics (The Ocean Cleanup: Feasibility Study). Because there is such a plastic soup floating around in the oceans I thought it worthy to support this initiative. How? By donating money to this research project. To find money for the "Ocean Cleanup Feasibility Study" the project uses crowdfunding.
If you want to start a project, or business, you need a starting capital. Not everybody has money sloshing around so you need to look for outside investors. You can ask relatives or acquaintances to invest in your venture. Or you could look for Venture Capital, or ask a bank to supply you with a loan.
Crowdfunding is an alternative way of financing. By publicizing your project on a crowdfunding platform on the internet you try to find investors. You must specify how much money you need, and in which period you want to collect the money. Next individuals have the opportunity to invest a small amount in the project. It is the intention that together these small investors fully fund the project. This in contrast to the above-mentioned large investors. Instead of only one or a few investors investing a large amount of capital, small investors, called the crowd, supply you with the cash.
The first form of crowdfunding was Sellaband, which started in 2004 as a platform on which musicians could introduce themselves in a short demo. People who believe in these musicians can then donate money, becoming the 'believer' of the musician. SellaBand offers each artist during a limited time the possibility to get between $ 3,000 and $ 250,000 together. If the musician manages to get the full amount together he can develop him selves and record an album. As reward the supporters receive non-monetary rewards such as a CD or a ticket to a concert by the artist. The three elements specific for crowdfunding where briefly discussed:
- A specific amount needs to be collected
- in a limited time,
- where supporters are promised non-financial rewards in the future
In the USA 1 billion dollars was collected in 2010. In a period of about five years, the total amount collected while crowdfunding rose very hard and it is expected that this figure will continue to rise in the coming years.
In 2012 € 14 million was crowdfunded in the Netherlands. According to a study conducted by crowdfunding consultants Douw & Koren this amount was raised by 570 projects and enterprises. Crowdfunding in the Netherlands is particular on the rise due to the reduction of funding from grant providers and banks.
Advantages and disadvantages of crowdfunding
Crowdfunding has its advantages and disadvantages. The first advantage being you can use crowdfunding as marketing tool. By publicizing about the project because you are searching crowd investors you make your project, the product or the brand known. Next the issuer of the project, or the entrepreneur, gets the possibility to get feedback about his (or her) project. You can see it as beta testing while attracting capital. In addition, by attracting funds from the crowd you do not lose control over your project. Something you should take into account when using the previously described "old fashioned" ways of financing. Finally, the funding through donations based crowdfunding is relatively cheap. No high priced consultants or lawyers need to be attracted. The only costs you have come from the platform you publicize your project on. Generally speaking the platform asks about 2.9 % transaction costs and up to 30 cents per transaction. In addition, the platform asks a fee. Idiego asks 4 % when the target is met and 9 % when it is not, Kickstarter and When You Wish both ask 5 % (Source: When You Wish). Lastly, entrepreneurs will also have to pay taxes on the capital raised, and if pledged they need to send their donors their agreed upon rewards.
Crowdfunding comes with disadvantages too. First of all, you only only collect a limited amount of money. On average you can get between 2,000 and 10,000 Euros. Next investors may hesitate to spend money without tangible rewards for them. And you need to publish your idea. Your idea will become known so someone else can use and implement it. Also the donors are at risk. Although a crowdfunding site will perform a first check on the reliability of the author of the project you never can be sure there are no crook projects. And what happens when the funding target is not met. There are some crowdfunding platforms who will release the collected money to the submitters of the project. But more on the advantages and disadvantage in my second and last article about the process of crowdfunding.
|When You Wish||From businesses to weddings and causes|
Read part two on The Crowdfunding Process