Crowdfunding your dreams

Man wearing a suit holding the words what is crowdfunding in his hands.

News & Insights

MoneyPlus Features Team

24th June 2016 at 2:24pm

In this materialistic world funding your dreams never comes cheap, and as banks have become more wary about lending money, the appetite to raise funds via other means is on the increase.

That’s where crowdfunding sites, a place where everyone could donate money to fund dream projects, kick in.

What is crowdfunding?

Crowdfunding simply takes the traditional way a business raises capital for a venture and turns it on its head.

Instead of going to a small number of investors and request large amounts of money to help kick off a concept, crowdfunding seeks out a lot of investors and asks small donations to achieve the same outcome.

Increasingly popular, crowdfunding campaigns of all types are getting funded on a daily basis, anything from vanity projects such as a cosmetic procedure (yes really) to video games. ‘Star Citizen’, a space combat game, has surpassed $100 million USD in funding, becoming the first crowdfunded project to do so by a very large margin.

And where does it stem from?

The first online crowdfunded project is thought to have surfaced back in 1997. Rock band Marillion were unable to afford to tour after the release of their seventh album, and American fans, not wishing to miss out managed to raise $60,000 using the then fledgling internet.

Inspired by this, Marillion have since used the same techniques to successfully fund the production of their following three albums. Other creative projects soon followed suit, such as films and publishing, and the first crowdfunding website appeared in 2001.

So how does it work?

Crowdfunding uses power of the internet to talk to thousands – if not millions – of potential funders. Typically, those seeking funds will set up a profile of their project on one of the ever increasing number of dedicated websites. They can then use social media, alongside traditional networks of friends, family and work colleagues, to raise money.

There are three different types of crowdfunding: donation, debt and equity.

Donation/Reward crowdfunding

People invest simply because they believe in the cause.

Rewards can be offered (often called reward crowdfunding), such as acknowledgements on an album cover, tickets to an event, regular news updates, free gifts and so on. Returns are considered intangible. Donors have a social or personal motivation for putting their money in and expect nothing back, except perhaps to feel good about helping the project.

Debt crowdfunding

Investors receive their money back with interest.

Also called peer-to-peer (p2p) lending, it allows for the lending of money while bypassing traditional banks. Returns are financial, but investors also have the benefit of having contributed to the success of an idea they believe in.

In the case of microfinance, where very small sums of money are lent to those with low or no incomes, most often in developing countries, no interest is paid on the loan and the lender is rewarded by doing social good.

Equity crowdfunding

People invest in an opportunity in exchange for equity. Money is exchanged for a share, or a small stake in the business, project or venture, and not goods or services. The idea is very similar to how common stock is bought and sold on the stock market.

As with other types of shares, apart from community shares, if it is successful the value goes up. If not, the value goes down.

Are there risks?

The watchdog, the Financial Conduct Authority, is taking a close interest in crowdfunding – and wants to ensure private investors fully understand the risks they are taking. For more information it’s worth checking out their site, they go into some depth around how crowdfunding works, some of the benefits and risks, and their views on this type of investment opportunity.

How do I get started?

Applying for a loan or pursuing other capital investments are two of the most painful processes that every entrepreneur has to go through, especially during the early stages of the company.

Thankfully, the application process for crowdfunding is a walk in the park compared to these traditional methods. In order to get started on the path to funding and exposure, an entrepreneur only needs to contact the chosen platform that best suits their campaign theme and purpose, share their venture’s powerful message, do some easy promotion, and hopefully establish some attractive rewards.

How do I know which platform to use?

Whether you’re crowdfunding your way through funding your first book or raising serious cash through accredited investors, there should now be a crowdfunding platform to meet your needs.

If looking to track down the platform that might suit your particular venture best, then it’s worth having a look at the Consumeraffairs website where they’ve listed the top 10 best rated crowdfunding sites along with their features and benefits.

Stand out in the crowd

Crowdfunding is a unique and hot industry these days. People are participating in it now in significant ways and love the idea of tying themselves to something they care about and can wed that with financial return.

So if you have a great business idea, creative project or passion you wish to fund, then you may already have a crowd out there waiting to join you.

Join the conversation and follow us on twitter @StandardLifeUK and Facebook and ask any questions you have about what crowdfunding is and how you can get involved.

This information in this article is correct as of June 2016 and should not be regarded as financial advice.

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