CreditTech - Crowdfunding

Essentials of Crowdfunding - From Concept to Campaign

Stephen Bahadar

stephen.bahadar@aut.ac.nz

Auckland University of Technology

June 15, 2024

Lecture outline

Traditional Ways of Raising Funds

Methods and Challenges

Overview of Crowdfunding

Definition and Importance of Crowdfunding
Crowdfunding Platforms

Crowdfunding Models

Donation-Based Crowdfunding
Reward-Based Crowdfunding
Equity-Based Crowdfunding
Debt-Based Crowdfunding
Real Estate Crowdfunding
Royalty-Based Crowdfunding
Impact or Social Crowdfunding

Traditional Ways of Raising Funds

Methods

Bank Loans: Borrowing money from financial institutions with interest.
Venture Capital: Investment from firms or individuals in exchange for equity.
Angel Investors: Wealthy individuals providing capital for startups in exchange for ownership equity.
Personal Savings: Using personal funds to finance a venture.
Grants: Funds provided by governments or organizations that do not need to be repaid.

Challenges

Stringent Approval Processes: Difficult to obtain loans or investments without strong credit or collateral.
Equity Dilution: Giving up a significant portion of ownership.
Limited Access: Smaller or less-connected entrepreneurs often struggle to secure funding.
Time-Consuming: Lengthy processes to secure funding.

Overview of Crowdfunding

Definition and Importances of Crowdfunding

Definition of Crowdfunding

Crowdfunding is a method of raising funds for projects, initiatives, or ventures through the collective contributions of a large number of individuals, often facilitated via online platforms.
It has gained significant popularity in recent years due to the rise of online platforms that connect project creators with potential backers from around the world.

Importance of Crowdfunding

Diverse Backer Base: Crowdfunding attracts a wide range of backers, providing valuable insights.
Access to Capital: Crowdfunding provides an alternative funding source for startups and creative projects.
Early Brand Exposure: Successful campaigns generate buzz and brand awareness.
Validation and Market Testing: Successful campaigns validate demand and offer early feedback.
Innovation and Creativity: Crowdfunding encourages unconventional ideas to thrive.

Overview of Crowdfunding

Crowdfunding Platforms

Role of Crowdfunding Platforms

Crowdfunding platforms serve as essential intermediaries, connecting project creators with potential backers. They provide the necessary infrastructure and tools to facilitate the entire crowdfunding process, ensuring a smooth and efficient experience.

Responsibilities of Crowdfunding Platforms

Crowdfunding platforms have a diverse range of responsibilities that are critical to the success of crowdfunding campaigns. These responsibilities include:

Providing a marketplace for campaigns and verifying project eligibility
Ensuring transparency and managing payments
Facilitating communication and handling disputes
Offering support, resources, and compliance monitoring
Promoting projects and ensuring security

Crowdfunding Models

Model 01: Donation-Based Crowdfunding

Donation-Based Crowdfunding

Characteristics

Purpose
Mechanics
Participants
Risk & Security
Regulatory Requirements
Platforms
Example(s)
Pros and Cons of each model

Donation-Based Crowdfunding

Purpose and Participants

Purpose

Donation-based crowdfunding aims to raise funds for charitable, social, or personal projects without offering financial returns to backers.
The main objective is to gather financial support from a community of donors who contribute out of goodwill or a desire to make a positive impact.

Participants

Project Creators: Individuals or organizations who initiate and manage the crowdfunding campaigns to raise funds for their charitable or social initiatives.
Backers: Individuals or groups who contribute funds to support the projects. They do not expect financial returns but are driven by a desire to make a positive impact.

Donation-Based Crowdfunding

Mechanics and Risk & Security

Mechanics

Project creators set up crowdfunding campaigns on online platforms, such as GoFundMe or Kickstarter.
They present their projects or causes, along with compelling stories, videos, and images to engage potential backers emotionally.
Backers can then contribute funds directly to the project.
The focus is on creating awareness about the cause and inspiring people to donate.

Risk & Security

Risk: Donation-based crowdfunding carries relatively low financial risk for backers since they are not investing in a business or expecting monetary returns. However, there is a risk that the project may not achieve its goals or fail to deliver on its promises.
Security: Reputable crowdfunding platforms often use secure payment gateways to protect the personal and financial information of both project creators and backers. However, there may be instances of fraudulent campaigns, so backers should exercise caution before contributing.

Donation-Based Crowdfunding

Regulatory Requirements, Platforms and Examples

Regulatory Requirements

Donation-based crowdfunding campaigns may not be subject to the same level of regulatory oversight as equity-based crowdfunding, as they do not involve offering financial securities.
However, some countries may have regulations related to fundraising, consumer protection, and tax reporting that project creators need to adhere to.

Platforms and Examples

Platforms: Donation-based crowdfunding platforms facilitate the creation and management of campaigns. Some popular platforms include GoFundMe, Kickstarter, Indiegogo, and Crowdfunder.

Example(s): - A charitable organization launching a crowdfunding campaign to provide medical aid to people affected by a natural disaster. - A non-profit organization raising funds to build a community center in an underserved neighborhood.

Crowdfunding Models

Model 02: Reward-Based Crowdfunding

Reward-Based Crowdfunding

Purpose and Participants

Purpose

Reward-based crowdfunding allows project creators to offer rewards to backers in exchange for their contributions. This model is often used for creative projects, product development, and entrepreneurial ventures.

Participants

Project Creators: Individuals or organizations seeking funding for their projects in exchange for offering rewards to backers.
Backers: Individuals who contribute to the projects in exchange for receiving tangible or intangible rewards based on their level of contribution.

Reward-Based Crowdfunding

Mechanics and Risk & Security

Mechanics

Similar to donation-based crowdfunding, project creators use online platforms to present their projects, but instead of donations, backers receive a product or service in return for their support.

Risk & Security

Risk: Backers may receive products of varying quality or delays in delivery, depending on the success and management of the project.
Security: It’s crucial for platforms to ensure that project descriptions are truthful and that the creators have the capacity to fulfill the rewards promised.

Reward-Based Crowdfunding

Regulatory Requirements, Platforms and Examples

Regulatory Requirements

Regulatory oversight may include consumer protection laws, especially if rewards are not delivered as promised.

Platforms

Popular platforms include Kickstarter, Indiegogo, and Patreon, where creators and backers interact directly.

Examples

A tech startup launching a new gadget through Kickstarter, offering early versions of the product as a reward for backers.
An artist seeking funds for a new album, offering copies of the album or concert tickets as rewards.

Crowdfunding Models

Model 03: Equity-Based Crowdfunding

Equity-Based Crowdfunding

Purpose and Participants

Purpose

Equity-based crowdfunding allows investors to receive equity or shares in a company in exchange for their investment. This model is suitable for startups and businesses looking to raise capital from a large number of investors.

Participants

Project Creators: Entrepreneurs or companies seeking to raise funds in exchange for equity in their business.
Investors: Individuals who provide capital to businesses in exchange for equity or shares.

Equity-Based Crowdfunding

Mehanis and Risk & Security

Mechanics

Platforms allow investors to purchase shares or equity in a company online, typically through a regulated framework to ensure investor protection.

Risk & Security

Risk: Investors face the risk of losing their investment if the company does not succeed.
Security: Regulatory bodies often impose requirements to ensure transparency and investor protection.

Equity-Based Crowdfunding

Regulatory Requirements, Platforms and Examples

Regulatory Requirements

Equity crowdfunding is heavily regulated in many jurisdictions to protect investors, requiring detailed disclosures and compliance with securities laws.

Platforms

Popular platforms include SeedInvest, Crowdcube, and EquityNet.

Examples

A startup tech company offering equity shares in exchange for funding its product development.
A small business seeking capital to expand its operations, offering equity to investors through an online platform.

Crowdfunding Models

Model - 04: Debt-Based Crowdfunding

Debt-Based Crowdfunding

Purpose and Participants

Purpose

Debt-based crowdfunding, also known as peer-to-peer lending, involves individuals lending money to other individuals or businesses in exchange for repayment with interest. This model is an alternative to traditional bank loans.

Participants

Borrowers: Individuals or businesses seeking to borrow money from a large number of individual lenders.
Lenders: Individuals who provide funds to borrowers and receive repayment with interest.

Debt-Based Crowdfunding

Mechanics and Risk & Security

Mechanics

Platforms facilitate the process by matching borrowers with lenders and often handle the collection and distribution of payments.

Risk & Security

Risk: Lenders face the risk of default by borrowers, depending on the creditworthiness of the borrower.
Security: Platforms typically use risk assessments and secure payment systems to manage these risks.

Debt-Based Crowdfunding

Regulatory Requirements, Platforms and Examples

Regulatory Requirements

Regulatory oversight may include financial regulations related to lending practices, interest rates, and consumer protection.

Platforms

Popular platforms include LendingClub, Prosper, and Funding Circle.

Examples

An entrepreneur borrowing funds to start a business, repaying with interest.
A small business seeking to cover operational costs through peer-to-peer lending.

Crowdfunding Models

Model 05: Real Estate Crowdfunding

Real Estate Crowdfunding

Purpose and Participants

Purpose

Real estate crowdfunding allows investors to pool their money to invest in real estate properties. This model provides opportunities for small investors to participate in real estate investments that might otherwise be out of reach.

Participants

Project Creators: Real estate developers or property owners seeking funds to finance real estate projects.
Investors: Individuals who invest in real estate properties through crowdfunding platforms.

Real Estate Crowdfunding

Mechanics and Risk & Security

Mechanics

Investors contribute to a pool that funds real estate projects, and in return, they receive a share of the rental income or profits from the property sales.

Risk & Security

Risk: Real estate investments can be illiquid, and there is the risk of property market fluctuations affecting the value of the investment.
Security: Platforms often provide detailed project disclosures and risk assessments to inform investors, and they may offer protections to safeguard investor interests.

Real Estate Crowdfunding

Regulatory Requirements, Platforms and Examples

Regulatory Requirements

Real estate crowdfunding is subject to regulatory oversight, which may include securities laws, depending on the structure of the investment.

Platforms

Popular platforms include RealtyMogul, Fundrise, and CrowdStreet.

Examples

A group of investors funding the development of a new apartment complex.
Investors pooling funds to buy and renovate distressed properties for resale.

Crowdfunding Models

Model 06: Royalty-Based Crowdfunding

Royalty-Based Crowdfunding

Purpose and Participants

Purpose

Royalty-based crowdfunding allows creators to raise funds by agreeing to pay back contributors with a percentage of the revenue generated by their project.

Participants

Project Creators: Artists, musicians, and creators who need funding for their projects.
Backers: Individuals who provide funding in exchange for a share of the project’s future revenue.

Royalty-Based Crowdfunding

Mechanics and Risk & Security

Mechanics

Creators offer backers a percentage of the future sales revenue generated by their product or creative work in exchange for funding.

Risk & Security

Risk: The project’s success heavily influences the returns for backers, as they depend on the revenue generated.
Security: Platforms often require detailed business plans and revenue forecasts to ensure that projects are viable.

Royalty-Based Crowdfunding

Regulatory Requirements, Platforms and Examples

Regulatory Requirements

Regulatory considerations may include intellectual property rights and revenue sharing agreements.

Platforms

Platforms like Royalty Exchange and Music Funding facilitate royalty-based crowdfunding.

Examples

A musician raising funds for an album, agreeing to pay back contributors from album sales.
An independent filmmaker raising money for a movie project, with backers receiving a share of the box office revenue.

Crowdfunding Models

Model 07: Impact or Social Crowdfunding

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