INTRODUCTION
Have you ever found yourself with a brilliant idea for a startup or venture, but lacking the necessary funds to bring it to life? This is where crowdfunding comes in, offering a solution to fuel your passion even when traditional funding falls short. Crowdfunding platform have played a significant role in supporting businesses that just need a head start and have the potential to thrive if given the right direction. Many successful companies owe their existence to crowdfunding. However, limited collateral often hinders promising business ideas, leading to disappointment and failure.
Crowdfunding ventures have become commonplace not only in the Western market but also in the European, Asia Pacific, and MENA regions. Each of these areas has its own unique set of rules and regulations governing crowdfunding activities. From obtaining the necessary licenses to targeting niche markets, these platforms often face numerous challenges in order to thrive. In this blog, we will explore a wide range of topics related to crowdfunding platform, including its fundamentals, operational practices across different regions, market share, the flow of money, major companies offering crowdfunding services, and predictions for the future of this industry.
FUNDAMENTALS OF CROWDFUNDING:
Crowdfunding, in simpler terms, can be described as the method in which individuals, groups and other for-profit organisation fund their ventures by drawing relatively small contributions from a relatively large number of people on the internet. By doing so they get the requisite funds, and their business ideas get a chance to dwell in this startup-saturated economy. It has become a popular way for individuals and businesses to raise funds from the general public using online platforms accessible via the internet, without the use of traditional financial intermediaries when compared to financing from traditional institutions such as commercial banks, business firms, and venture capital firms.
HOW DOES CROWDFUNDING OPERATE?
Crowdfunding involves three main members:
- Funding portals (intermediaries),
- Contributors (funders/investors),
- Crowdfunding campaign creators (fund seekers/entrepreneurs).
The very first step in the crowdfunding venture requires the fund seekers to register and create an account on a crowdfunding portal, where they put in the data regarding necessary identity and project information. Once registered, the fund seekers can initiate a crowdfunding campaign. The platform providers then evaluate and verify the provided information, including the business idea, experience, funding amount, and personal details of the fund seekers. Moreover, the platform providers assess the security and repayment method to ensure that investors will be repaid at the campaign’s conclusion.
Suitable projects are approved by the platform management, who may request the borrower’s signature on a loan agreement. Finally, the approved project is published on the funding portal, permitting the collection of funds from contributors.
CLASSIFICATION OF CROWDFUNDING TECHNIQUES:
- Peer to peer lending: This method is very similar to traditional borrowing from a bank where the funds are repaid with interests to the concerned investors or the contributors.
- Donation Based: These types mainly fall under the categorization of charity for disaster or relief fund carried on by the government or individuals. These donations are mainly fed in through social media promotions where large inflow of funds are projected. People often contribute to these charities expecting nothing in return. Most of the time even the government also relieves the tax on these types of funds so that the entire amount reaches to concerned groups, organizations or individuals. GoFundMe, l%Club and Act4Greece remain a major source of crowdfunding compared to other types of crowdfunding campaigns.
- Equity Based: This method allows us to raise funds from the investors in exchange of unlisted stakes of the company. These stakes aren’t listed on the stock exchange and cannot be bought and sold as shares.
Overview of Global Crowdfunding Platforms
As of today, a whopping USD 17.2 billion is generated yearly through crowdfunding in North America alone, and these figures are only growing! With over 6,455,080 worldwide crowdfunding campaigns launched last year, there’s no denying the significant role these crowdfunding platforms play in the global economy. They empower individuals and companies to raise money for diverse causes, ranging from personal needs and creative projects to business ventures and charitable initiatives.
Legalities involved in obtaining crowdfunding license in various regions:
Europe: The European crowdfunding platforms required an authorised licence from the new European Crowdfunding Service Provider (ECSP) in order to operate and raise capital.
USA: For operating a crowdfunding project the intermediary must register with the Securities and Exchange Commission (SEC) as a broker or as a funding portal and become a member of a national securities association.
UAE: The UAE government allows a crowdfunding venture to begin its operation only if the platform have been registered and licensed with the central bank or the other regulatory bodies sucha as Dubai Financial Services Authority, The ADGM Financial Services Regulatory Authority, or Securities and Commodities Services Authority.
MARKET SIZE OF CROWDFUNDING PLATFORMS:
The crowdfunding platforms have gained a fair share of the market size ever since it began operations in multiple companies and startup charities. Funding organizations have come forward and have gained benefits from such initiatives.. On the contrary, there are companies which have seen the downfall and there has been a loss of funds resulting in the waste of resources at the same time. With key players taking charge of a large chunk of the profit, the crowd funding space is here to stay and more so, to expand manifold.
If we look at the reports, the global crowdfunding market size was valued at 1.67 million dollars in 2022 and is expected to expand at a rate of 16.67 %. The social media platforms are giving a major boost to these crowdfunding websites. People with huge followers come and gain the excessive benefit from the platforms. Rising artificial intelligence is also one of the major reasons for the vast growth in the crowdfunding platform. Blockchain activity and other innovative techniques give way to the popularity of crowdfunding activities which in turn provides major growth to the crowdfunding market.
The Future perspective and the challenges faced by Crowdfunding Platforms:
Crowdfunding platform are here to stay with various products and services thriving and getting a chance to see the light of the day all because of raised funds. Although the crowdfunding space is relatively new, its popularity has overtaken other fundraising strategies.
Although crowdfunding has many success stories, it also has several drawbacks as it is in the beginning stage and is highly unpredictable. Many researchers indicated that the risks associated with crowdfunding are similar to the risks associated with any different financial sectors, such as investment and securities activities and payment services. However, as crowdfunding is operated online, it is also significantly exposed to the vulnerabilities of Internet-related threats and other related technological risks such as cyber-attacks. Additionally, many crowdfunding platforms operate across borders and widen the legal complexities.
Numerous individuals see crowdfunding as an easy or free way to make money, but it takes a lot of effort to establish a project that backers perceive as a worthwhile service. Success is not guaranteed in this method of funding. As crowdfunding grows in popularity, funders have become smarter about the projects they back. Crowdfunding will undoubtedly be a gateway for future investment as it expands our horizons into various sectors which would otherwise be not known about.
Blog by Madhulika Pandey
