Crowdsourcing is a buzzword at the moment, with the recent launch of multiple new platforms to fund new ventures in the UK alone, including one from legendary UK investor Nichola Horlick, www.moneyandco.com. Crowdfunding was worth a record $5.1 billion in the US alone in 2013 and is predicted to reach more than £12.3 billion in loans in the next decade by the educational charity Nesta. One of the reasons for this boom is historically low interest rates, which make it difficult for investors to make a good return. One of the other reasons is the lower costs of starting a business, often thanks to the internet, and the ease of communicating it.
However, lower costs or not, it still takes capital to start a business. And crowdfunding is only one way to do it. There are other ways, including releasing equity from the value of your home, a traditional bank loan, or even VC. If you decide to choose crowdfunding, there are three models: Reward, Equity, and the very new debt model. Crowdfunding started with the ‘reward’ model, typified by Kickstarter.com and indiegogo.com essentially a philanthropic way to support creative individuals in their projects with little or no financial reward expected (Kickstarter/Indiegogo) to a model of ‘equity crowdfunding’ typified by FundRazr/Fundable/etc, where the inventor shares some of the ownership of the product or service with investors.
Debt crowdfunding is very new, and the risks associated with it are difficult to calculate. (Historically venture capitalists lost money on up to 75 per cent of their investments.) The rules on that are changing in the US, with the planned JOBS act allowing regulators to change the rules that currently allow only 35 ‘non-accredited investors’. (People with more than $100k in income). They will soon be allowed an unlimited number, raising up to a maximum of $1m over a 12 month period.
PayPal recently announced a change in its rules to allow for crowdfunding, but warned that investors should be aware of the difference between ‘pre-ordering’ a product that is definitely coming to market, however far into the future, and investing in the proof of a concept that might never be realised.