vrijdag 4 februari 2011

The Crowdfunder – an “AdVenture Capitalist”

Last week’s blogpost “Equity or Debt?” the Next step in Crowdfunding highlighted the three fundamental forms of crowdfunding platforms:

1.       Crowdfunding as a method for sponsorship with a non-financial return

2.       Debt-crowdfunding with a financial return (P2P-lending)
3.       Equity based crowdfunding with a potential financial return and ownership
Whether you are a crowdfunder, an adVenture Capitalist, or if you have an initiative or you are an entrepreneur looking to raise money, it’s critical to have a good understanding of the models and the different types of initiatives they can support.

If you take a close look at the burgeoning marketplace for crowdfunding platforms, explosive growth in the number of platforms that provide crowdfunding solutions is being seen in the sector for “softer projects”. These can include “good causes”, “non-profit ventures” or “commercial projects” that don’t offer a commercial return to the contributors who put forward funding. In my post “Equity or Debt; the Next Step in Crowdfunding”, I referred to this category as “Crowdfunding as a method for sponsorship with a non-financial return”. Based upon donations and sponsoring from the crowd these platforms are gaining in popularity fast. Sometimes with a focus on a particular field such as movies, books and art projects among others. Probably the most well known platforms in this category are: www.kickstarter.com, www.indiegogo.com and www.sellaband.com. Let’s take a look at them: 

If you’re looking for startup funding for a creative initiative, Kickstarter is a crowdfunding platform that allows just about anyone with a unique idea to share a potential project with the site’s 1 million online viewers. People that recognize the project’s potential have the opportunity to “pledge” money to make it happen. On Kickstarter, a project must reach its funding goal before time runs out or no money changes hands. Under the Kickstarter model, project creators keep 100% ownership and control over their work by offering products and experiences that are unique to each project. In 2010, more than $27 million was pledged through Kickstater and 3,910 projects were funded by the crowd. 

[Image source: www.kickstarter.com]

Sellaband is a platform that raises money for artists to help them launch their music careers by crowdfunding donations from fans. Music fans can search for talent, view the charts and listen to some songs and start discovering new music. Fans can support their favorite artists by buying a “part” (a unit that represents a level of interest in a project) and helping them to raise the funds for a new music project such as a new album, tour or the promotion of their music.

At all times before the Fund raising goal has been reached fans can withdraw their money from a Music Project and move it to another project. Once an artist has reached his/her goal the doors are closed, meaning that no new Believers can come on board and the contributors’ can no longer withdraw their money. The artist will use the funds raised to complete his/her Music Project. Believers’ “parts” translate into rewards in the form of free downloads and other goodies artists might offer like exclusive CDs, t-shirts, free lunches, etc. or even a cut of their revenues.

[Image source: www.sellaband.com]

On Indegogo, individuals can create a funding campaign to raise money quickly and securely for something they are passionate about? By leveraging their individual networks as well as Indigogo’s network, the can reach potential contributors globally. To date, Indegogo has helped to raise millions of dollars for over 15,000 campaigns, across 155 countries.

The model works by offering contributors unique perks or tax deductions in lieu of offering profit while the campaigner always keeps 100% ownership of their project or venture. Indegogo will feature selected campaigns on its Home Page and promote the initiate through the press and via social media.

[Image source: www.indiegogo.com]

The second category mentioned in my latest post referred to Debt-Crowdfunding platforms also known as the act of “Debt-Crowdfunding with a financial return (P2P-lending)”.  These platforms offer the crowd an opportunity to invest in debt for start-ups or entrepreneurs. The most well known example in this category is www.kiva.org who to date has initiated loans of over US $190m.

[Image source: www.kiva.org]

Kiva's mission is to connect people, through lending, for the sake of alleviating poverty. With Kiva you loan money to contribute to the funding of a loan, typically to an individual or small entity in a 3rd world country, in return for the repayment of the loan with interest. Money is received through the Kiva platform and transferred to a micro-financing institution (MFI) close to the beneficiary. Once the required loan amount has been reached, the loan is initiated and payments with interest are returned through the MFI to Kiva. Once the loan has been repaid, individuals can withdraw their money or make a new loan to another worthy cause.

Typically Kiva and other such platforms operate under the philosophy that good-natured individuals will help others given the opportunity to do so in a transparent, accountable way. The poor are highly motivated and can be very successful when given an opportunity and loans encourage more accountability than donations where repayment is not expected.

One challenge for such platforms is their need to offer an efficient capital movement but by using third party organization to collect the interest payments. While it would seem that the nature of the loans are or particular high-risk to the lender, Kiva reports a current repayment rate of nearly 99%. Additionally, due to the nature of the loans and the typical demographic of the recipient, the cost of capital is also considerably higher than for examples bank loans. When bringing in the social element (i.e. investing in third world entrepreneurs), the model still withholds value for the movement in capital but is not optimal for lenders whose motivations do not include philanthropic motivations. 

 A transit category between Debt Crowdfunding and Equity-based Crowdfunding is revenue share Crowdfunding. In this form the entrepreneur offers a percentage of the Revenue to be distributed among the investors. This model suffers from the some of the same characteristics as Debt-Crowdfunding – the borrower commits themselves to high interest rates and therefore extreme financial pressure from the start.  Although many argue that this model is fair towards investors and entrepreneurs, as the cost are only incurred when the organizations is making a turnover. Fact remains that it has the potential to encumber the organizations with excessive burden in its ability to make future investments, making the firm a cash-cow for investors but increasing the odds that the enterprise is less likely to survive. 

There is also the potential for a revenue share model to potentially disadvantage the investor. Consider Goldman’s recent Facebook-deal. If Facebook was crowdfunded from the start in a revenue share-model, the investors would only have a claim on Facebook’s turnover (aprox. 800 million in 2009) and not on the recent valuation of 50 billion which would otherwise be the case if an equity-based model was used.

The third category mentioned in my latest post referred to Equity-Based Crowdfunding platforms also known as the act of “Equity based Crowdfunding with a potential financial return and ownership”.  This emerging model provides very different advantages to both investors and entrepreneurs in search of capital by best aligning the interests of investors and their investments. In this model investors have exactly the same incentive as the entrepreneur – the creation of value in the company. Thereby this model allows a clean inflow and exit point as equity is tradable. Despite the legal challenges, there are already some platforms who claim to be Equity based such as www.growvc.com (via a grouping model) and www.crowdcube.com (set to launch on 10-02-2011, however UK-only). Although legal challenges make it hard for these pioneering platforms there isn’t a best practice model yet and the models currently being rolled-out remain a bit unclear.

Personally I think Crowdfunding could be the solution for the capital immobility entrepreneurs are experiencing on a global scale. Although this capital immobility could well be partly induced by the recent credit crunch, fact remains that start-ups and small and medium-sized enterprises are still experiencing problems in their capital search.

In an attempt to place Crowdfunding in the current landscape of entrepreneurial funding sources the graphic above was developed. It becomes clear that entrepreneurial Crowdfunding could be used for investments from € 20.000 euro up to € 2.5 million and could be an alternative  for or an addition to FFF-investments, bank loans, VC investments and private equity funding. I’m not advocating Crowfunding as a substitute for other means of funding but more as an additional tool to provide in a company’s capital needs. The funding itself is the main point of interest here, not the means used to acquire it! 

I’m confident to say that this yet instable state of the Crowdfunding industry will move towards a few best-practice models and we will see the rise of a few dominant platforms. In Q2 2011, www.symbid.com, will launch a Crowdfunding platform that facilitates Equity-based Crowdfunding in a more straightforward way than currently is available. Symbid facilitates the direct participation by investors in existing as well as start-up businesses without any restrictions or regional availability. 

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 .