Crowdfunding: a new form of financing and investing.
Author: Enrico Baralis
Date of Publication: 11/07/2022
Looking for an innovative investment opportunity requiring small capital? Want to raise funds for your start-up online? Crowdfunding is made for you! You’ll find a specific type for every objective and necessity.
The technological innovation in the financial sector created more investment opportunities than ever before. For example, crowdfunding is surely one of them. In fact, entrepreneurs have been dreaming of sharing their revolutionary ideas with a large audience for decades. What’s more, nowadays, is that they can make their supporters become investors.
A new way to raise funds
Crowdfunding means basically to raise capital from a multitude of users online, even with very small amounts of capital. This new type of investment allows reaching an increasingly large number of people while maintaining low costs. Special virtual platforms allow entrepreneurs, especially of innovative start-ups, to present themselves to a wide audience of possible investors to raise capital from them (Bruton et al. 2014, pp. 9-26). Moreover, the campaigns’ promotion through social media plays a significant role in the crowdfunding success. This new financing option offers an alternative to traditional solutions related to the banking system, such as seeking loans.
Furthermore, it allows a wide audience to support the company's activity while having a small amount of capital. This possibility helps to reduce the impact of intermediaries in the process of raising capital as well. Most of the crowdfunding platforms only ensure the matching of supply and demand, without obligatorily providing an additional advisory service to investors. Thus significantly this reduces the costs of the process (Mamonov et al. 2018, pp. 65-73). Crowdfunding is a very recent phenomenon, but it’s growing very fast. For this reason, different jurisdictions set specific boundaries to this form of financing and investment, but generally the regulation process is still in progress.
Different forms of crowdfunding
To date, there are mainly four types of crowdfunding (Quesada 2018, pp. 103-134):
- equity-based crowdfunding (or crowdinvesting): the raising of capital by selling a portion of ownership in the company. This type of campaign normally requires reaching a specific minimum in order to confirm the fundraising validity. It is also possible to buy different types of shares having a specific price and specific features.
- lending-based crowdfunding: it means raising debt capital through the contribution of many users rather than a single lender. Also, guaranteeing the payment of interest (exceptions to this are some cases of social lending in which interest may be reduced or absent altogether).
- reward-based crowdfunding: it means raising capital by providing the investor with products and services developed by the company itself. This alternative form of remuneration does not consider any financial compensation. Normally, such rewards are commensurate with the amount paid to fund the business.
- donation-based crowdfunding: it means raising capital through acts of liberality by users without any form of financial remuneration. This tool is mainly suited to raise funds for charitable and solidarity purposes.
Finally, there is also a new kind of fundraising that is becoming more and more popular: real estate crowdfunding. This new form of financing gives a chance to raise capital by selling small portions of a large property to a vast number of investors. On the other hand, the possibility to make a real estate investment without having to buy an entire property opens new ways for portfolio management.
Quesada, C. E. (2018). Crowdfunding in Europe. European Contract Law in the Digital Age, 103-134.
Mamonov, S., & Malaga, R. (2018). Success factors in Title III equity crowdfunding in the United States. Electronic Commerce Research and Applications, 27, 65-73.
Bruton, G., Khavul, S., Siegel, D., & Wright, M. (2014). New Financial Alternatives in Seeding Entrepreneurship: Microfinance, Crowdfunding, and Peer-to-Peer Innovations. Entrepreneurship: Theory and Practice, 39(1), 9-26.