Entrepreneurship – from ideas to reality
Entrepreneurship – from ideas to reality

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Entrepreneurship – from ideas to reality

8.3 Crowdfunding

Crowdfunding has enabled start-ups and microbusinesses with no tangible assets to offer as security, no track record of profitability, and limited internal cash resources, to use their existing customers and supporters to provide the funding they need to develop their business.

Crowdfunding offers online funding opportunities to the public, rolling up small sums of money offered by many individual lenders or investors, sometimes as little as £10, to form a potentially large amount for the borrower. Matching borrowers to willing lenders is usually made via the platform which distributes requests for funds to borrowers. Potential investors and donors can see the amount of support from others and may be influenced by supporters’ comments and business updates during the funding period. There are different types of crowdfunding:

  • Investment-based or equity-based crowdfunding – the investor receives a share in the business in return for their funds and the lender receives interest and repayments as usual with bonds and debentures.
  • Peer-to-peer lending or peer-to-peer crowdfunding – funds can be arranged as loans. The lender receives interest payments for a fixed period of time and repayment of their loan amount in full.
  • Reward-based crowdfunding – funding is arranged in return for goods or services. The value of the goods or services is determined by the borrower.
  • Donation-based crowdfunding – funding is arranged for a charitable cause. Investors donate funds without expecting anything in return.
  • Invoice trading – a type of alternative finance managed on an online portal which helps businesses borrow in advance of receiving money from their customers.
  • Mini-bonds – offered on some equity-based crowdfunding portals. These are not regulated in the same way as equity-based crowdfunding and have a higher risk for the investor than equity.

Crowdfunding and peer-to-peer lending (covered in the next sub-section) are two innovative ways to get money into your business, but they are very different in some important aspects. For a business in the earliest stages of its life cycle, crowdfunding may appeal. You make your pitch to investors via a platform and those interested can contribute towards your proposed venture. Kickstarter is the world’s largest reward-based crowdfunder.

Investment crowdfunding is growing rapidly. UK examples are Seedrs and Crowdcube. If you do go down this route, you will need professional legal advice and to ensure your financial forecasts are in good shape. You can find out more about each of these in the Further reading section at the end of this week.

Activity 2 Succeeding with crowdfunding

Timing: Allow about 10 minutes

Read more about how to succeed with crowdfunding by reading advice from Nesta [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] and then answer True of False to the statements below.

All ventures funded by crowdfunding platforms are successful.

a. 

True


b. 

Fasle


The correct answer is b.

Discussion

The correct answer is False. More than half are not.

The biggest mistake crowdfunders make is in asking for too little money.

a. 

True


b. 

False


The correct answer is a.

Discussion

The correct answer is True. It is essential to make proper estimates of your costs.

All platforms are the same so there is no point in shopping around.

a. 

True


b. 

False


The correct answer is b.

Discussion

The correct answer is False. Some platforms are focused on a particular sector, cause or industry. Some may be rewards-based, others specialise in equity-based lending. There may be a difference in the commission taken.

All crowdfunding platforms are regulated by the FCA.

a. 

True


b. 

False


The correct answer is b.

Discussion

The correct answer is False. You should read further about the risks to investors and lenders.

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