dinsdag 25 januari 2011

“ Equity or Debt?” the Next Step in Crowdfunding

Last year it became clear that Crowdfunding is becoming big business. With the rise of Crowdfunding platforms all over the world, it seems valuable to take a closer look at the future of the industry and the way Crowdfunding can contribute to a healthy entrepreneurial climate. In my opinion it all comes down to what all these platforms actually deliver to project owners or nascent entrepreneurs. In these terms we can roughly define three kinds of platforms:

1. Crowdfunding as a method for sponsorship with a non-financial return
An example of such a platform is the highly successful site www.kickstarter.com , here you can pledge money to projects of your choice and in return you receive a prototype or some sort of non-financial return. The return is based upon your financial involvement in the project and is set by the project owner.

2. Debt-Crowdfunding with a financial return (P2P-lending)
Lately many P2P lending platforms are using Crowdfunding for financing debt in start-ups, although one can argue that a start-up (or actually a project that isn’t a company yet) seems to benefit from this availability of capital the opposite seems to be true. By financing a start-up project with debt it seems that irrational returns to crowdfunders are required to hedge the associated risk. This trend we do see also in platforms for micro financing, where entrepreneurs in developing countries are paying up to 1,5-2% interest per month, equaling 20% interest on a yearly basis. Thereby some platforms offer the opportunity to project owners to set interest rates themselves, offering interest returns up to 20%! Obviously a sweet prospective for potential investors, however a personal credit is cheaper and seriously how confident are you in an entrepreneur that lets his net profit be vaporized by interest payments?

3. Equity based Crowdfunding with a potential financial return and ownership
Although by many labeled as impossible due to financial regulations, this year we will see the first equity based platforms brought to market. These platforms will enable direct investments in and direct returns from new start-ups or existing companies. As return Crowdfunders become owner of the company. In comparison to Debt-Crowdfunding a far better model as it perfectly aligns interests of potential investors and the entrepreneur. Due to the multiple roles of the investors (first customers, supplier or crowdsourced human resource of the company) and the open relationship with the entrepreneur we will see the creation of the ultimate Stakeholder model.

The third category will obviously contribute to a healthier entrepreneurial climate, and could well be the solution for closing the equity gap and our drift away from the old-fashioned Shareholder model. But until that is the case, many hurdles still stand in the way of the global dispersion of these platforms. For example the latest Goldman deal (the private placement of Facebook shares) was recently pulled back and was no longer offered to US citizens due to the tremendous media attention it got. This had everything to with SEC Regulation D, stating that private placements like “the Facebook deal” cannot be the subject of advertising, general promotional seminars or public meetings in connection with the offering.

As equity based crowdfunding comes down to exactly that, the US market (still one of the most entrepreneurial markets in the world) will be a major hurdle to overcome, a hurdle that might be unable to take. However the strict SEC regulations can’t withhold the development and dispersion of equity based crowdfunding platforms and the rise of the professional social funding industry that is equity driven.

By Korstiaan Zandvliet

Korstiaan Zandvliet holds an MSc in New Business Venturing and Entrepreneurship and has a background in Sociology and Business Administration. He is a frequent writer of expert blog articles on Social media, Crowdsourcing and Crowdfunding. After holding a position as Marketing Manager for a Dutch software start-up, he co-founded a company called Symbid. 

Symbid is a radical new innovation which enables (nascent) entrepreneurs to overcome financing problems for their start-up or small business. Symbid focuses on entrepreneurial finance needs up to € 2.5 million by utilizing the concept of Crowdfunding in a radically new way. In contrast to currently available Crowdfunding sites, Symbid developed a financial and legal framework which allows Crowdfunders to actually become a shareholder of the offered Crowdfunding propositions. For more information www.symbid.com .

8 opmerkingen:

  1. Another leader in the crowdfunding industry is http://peerbackers.com - a site 100% dedicated to entrepreneurs wanting to get their startups off the ground. I love seeing this industry mature!

  2. Hey Korstiaan,

    How do you look at the situation of the equity crowdfunding in respect to exit possibilities and liquidity of equity shares in crowdfunded projects. In other words, is it attractive for investors to invest in equity crowdfunding projects if there is no exit possibility.

    In my view, even though the SEC with come regulations and then equity crowdfunding will become possible, an exit is needed for the medium to larger investors.

    Curious to see where this goes.

  3. I think there is a 4th model - one where there is a financial return for the crowdfunder, but without obtaining equity, but based on reaching milestones such as reaching certain revenue-levels. Seeds.nl, ABN AMRO bank's crowd funding pilot is doing this.

  4. I suppose there is a 4th model -one where there is a fiscal return for the crowdfunder, however without acquiring value, yet dependent upon arriving at breakthroughs for example arriving at certain income levels. Seeds.nl, Abn Amro bank's swarm subsidizing pilot is doing this.

    crowdfunding platform

  5. In my perspective, in spite of the fact that the Sec with come regulations and after that value crowdfunding will get conceivable, a passageway is wanted for the medium to bigger speculators crowd funding platform .

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