Crowdfunding : a fresh method for financing ideas

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What is crowd-funding ?

During the crisis, micro-financing methods have certainly gained in popularity as an alternative to traditional banking methods. Is it simply a trend or a long-term challenger to traditional creditors ? This is one of the questions we will attempt to answer in this article.

If you are not familiar with the idea of crowdfunding, simply consider it as a financing tool used to fund entrepreneurial ideas and projects, the main difference being that it circumvents the traditional banking intermediaries.

How do they manage to do so ? Well, instead of trying to reach a level of guarantee only a bank could provide to cover for the risk incurred, this one is dispatched by bringing in a load of individual micro-investments thereby minimising individual exposure.

Success rate

Many diverse activities have already been funded through, from cinematographic projects to innovative products such as consumer friendly 3D printers. When it comes to project sizes, they range from a mere 1.000$ and can amount up to 10.000.000$. When it comes to the success rate, it appears that more than 40% of projects are succesfully funded, some even managing to gather more than the pledged amount. But instead of statistics, this interview posted by TechCrunch might interest those who want to prepare a successful campaign.

Is it worth it ?

crowdfunding sectors

To be able to determine whether crowdfunding platforms are a good idea, all depends on which side of the coin you place yourself: to put it simply, it depends if you're an entrepreneur looking for a start-up capital or a micro-investor looking for opportunities. There are mainly two business models within the crowdfunding business: one is donation-based (with some optional returns in perks) such as Kickstarter. The donation-based model is the dominant one on the web, the driver being the possibility to appeal directly for support from interested future consumers of the product/service in question. Of course, to initiate a donation move a buzz is often necessary to reach a sufficient audience. Therefore, a lot of younger internet users respond well to this model. In consequence, most of projects using the donation model tend to be oriented towards entertainment or social entrepreneurship. Out of a Wikipedia aggregated list of 53 highest funded projects, 24 had to do with the gaming-industry, while a notable amount of others were involved with the broader consumer electronics sector.

As pointed our by a recent Forbes article, one other huge area seems to find its audience among crowdfunders : social entrepreneurs. Their success is not surprising as donation and social are usually intertwined.

Now, concerning the micro-investment based model, it is much more advantageous to funders as they can actually make some profit our of their investment and in some case even acquire shares in the business.

Which platform to choose ?

The choice of the platform depends greatly of your role (investor/entrepreneur), of the type of project you want to launch (social/corporate), of your geographical situation and of course the business model you want to use to raise funds. Answering to these questions should let you come up with a reasonable small amount of actors on the market. Here is a interesting list of potential services summed up by Forbes. Last but not the least, it is necessary to proceed with a cost analysis of the services provided by the platform of your choice. While cost vary, they usually settle in a bracket of 6% to 14% of total funds raised by the service you choose.

Why are service fees unavoidable

While not easy, it is of course possible to avoid these fees by setting-up your own web platform with much small price tag (mainly server maintenance and a webdesigner salary). But with the loss of service cost, comes the loss of a certain audience, which may prove to have quite a negative impact on your promotion. In the end, we are forced to admit that service fees are almost unavoidable if you do not yourself have the ability to raise a decent marketing campaign around the project you want to crowdfund.