Investing in Ideas – Crowdfunding

Crowdfunding is a relatively recent phenomenon. The term is composed of the English words “crowd” and “funding”. The essential feature of crowdfunding is thus the generation of funds to finance various projects by many people.

Variants of crowdfunding

Variants of crowdfunding

Not every form of crowdfunding has the same goals. While some initiators raise revenue for a good cause, other projects serve to finance start-ups.

Equally different is the amount of money collected – in extreme cases, more than $ 20 million can come together for a single project (The nature of the provision of funds differs in some cases considerably. Four different models can finally be named:

  • Reward-Based Crowdfunding (classic crowdfunding)
  • Equity-based crowdfunding (crowdinvesting)
  • Lending-based crowdfunding (crowdlending)
  • Donation-Based Crowdfunding (Crowddonation)

Classic crowdfunding

Classic crowdfunding

Implementing projects usually requires a minimum amount of capital. These are set by the initiator of the campaign at the beginning. Each sponsor mentions the amount he / she wants to invest.

Once the minimum amount of capital is reached, the action starts and from the willingness of investing the actual provision of said sum.

In some cases, projects succeed in over-financing. For the Exploding Kittens card game in 2015, an incredible 87.825% of the targeted minimum of US $ 10,000 was raised to the development of the game, at US $ 8.78 million.

If a campaign does not reach the set minimum, the initiator will in most cases not receive any money and the potential donors will not pay.

In return for a cash benefit, the initiator can offer consideration. For small campaigns, these are often gifts of more or less idealistic value or a copy of the finished product, while large projects are usually rights, monetary or in kind.

The communication of the campaign takes place via an Internet platform. Here, the initiator presents the plan project in detail by means of a description or short videos, thus promoting the support. Potential donors head for appropriate sites and choose an interesting project.

During the project period marketing is a non-negligible aspect. Only a campaign that is perceived by other people can ultimately be financially successful. It is therefore important, especially for small campaigns, to spread them as widely as possible in social media.

At the end of the term of a campaign, the platform pays the money less a commission to the initiator. Intermediate financial service providers may charge additional fees.

Crowd Investing

Crowd Investing

Crowdinvesting is characterized by the fact that financiers acquire holdings in companies or real estate and thus profit from returns on profits earned. Partial is also a severance pay at termination part of the contract, which is based on the increase in enterprise value. The investment is usually made via silent participations, participation rights or shareholder loans.

For young entrepreneurs, this form of financing is particularly attractive when only small sums are needed and / or a loan from a bank is out of the question.

In contrast to classic crowdfunding, crowdfunding has only played a marginal role for a long time, at least in Germany. However, most recently, the total volume increased to more than EUR 60 million and achieved growth rates of 39% between 2015 and 2016.

The most popular forms of investment are real estate (between 2011 and 2017: EUR 115.6 million), companies (EUR 17.4 million) and energy projects (EUR 17.4 million).

Decisive due to the risk of default is the intensive review of the project by the site operator to ensure the company’s earnings prospects, the integrity of its business partners and compliance with legal standards. At low sums this often stays off.

On the other hand, the detailed provision of entrepreneur data in such projects is a critical component, as they can also benefit the competition. Therefore, there is always an insufficient level of knowledge among investors and associated misperceptions.

Although crowd investing is an attractive investment with high returns, the risk of default is not to be underestimated. In case of failure of the financed project also the crowd investor loses his money.

Crowd lending

Crowd lending

Crowdlending is an alternative to a traditional bank loan. The key difference is that no bank decides on lending. Many individuals finance a loan for a person or a company here. This must be repaid within a fixed term together with interest.

Decisive for the amount of the interest is the creditworthiness of the applicant. It is checked by the operator before setting the project on the website. The latter reserves the right to reject applications if, for example, the default risk is too high.

For investors, crowd lending is particularly interesting because of the good return opportunities. But again, the higher these are, the greater the risk of default. At the same time, however, the conditions are transparent and clearly regulated.

Donation generation through crowd donation

Donation generation through crowd donation

Collecting donations is rarely rewarded. Also, the success of a campaign is not necessarily tied to a minimum sum. The initiator receives the sum that could be collected at the end of the campaign.

Crowdfunding platforms

Crowdfunding platforms

The first known crowdfunding platforms were created in the media sector. For example, the artistshare.com platform has been aimed at music fans since 2003 who donate money to fund recording studios. SellaBand started with a similar concern in Europe in 2006, but went bankrupt in 2015.

Indiegogo followed in 2008, kickstarter.com a year later. Since then, the number of providers has multiplied. All have in common is that the generated funds are exclusively earmarked.

In Germany, among other things, startnext.de has established itself for projects of all kinds in addition to the American companies.

For example, exporo.de, ev-capital.de of the real estate company Engel & Völkers or grundag.de have specialized in investing in real estate. Bettervest.de, gls-crowd.de and greenrocket.de advertise investments in environmentally friendly projects, econeers.de and greenvesting.de with investments in sustainable energies.

Seedmatch.de, deutsche-crowdinvest.de and companisto.de are just some of the start-up focused operators.

On donor funds specialized platforms, however, are betterplace.org, leetchi.com and gofundme.com. The best-known providers in the field of crowdlending are auxmoney.com and smava.de.

A comprehensive overview of platforms with these and other priorities can be found here .

Benefits of crowdfunding for startups and businesses

Benefits of crowdfunding for startups and businesses

  • Checking market opportunities: The success of a campaign can serve as a test of the market potential of a product. If the generation of the minimum capital already fails, it can be assumed that the product will not sell well either.
  • Building up potential customers: the campaign and its involvement enable a company to enter into dialogue with future buyers and create customer loyalty in advance. Supporters of a project during the term, they act directly as multipliers.
  • Good conditions: The conditions for the procurement of money are usually cheaper than with traditional banks, since middlemen eliminated.
  • Optimization of cash flow: The first sales figures are just as transparent as the sum of the pre-financing. Thus, purchasing, production and cash flow can be planned for the first time.

Conclusion

 

Crowdfunding represents an attractive form of financing or investing for both the initiators and the investors – as long as you stick to the rules of the game and are equally aware of the opportunities and risks.