Crowd funding in Finance. Is there a link?
Crowd funding and Finance, almost everyone knows that the two words couldn’t exist without each other. To find out why it is like that, first we have to find out what crowd funding is.
Crow funding or crowd financing describes the collective effort of individuals who network and pool their money, usually via the Internet, to support efforts initiated by other people or organizations. Crowd funding is used in support of a wide variety of activities, including disaster relief, citizen journalism, support of artists by fans, political campaigns, startup company funding, movie or free software development, inventions development and scientific research.
Crowd funding can also refer to the funding of a company by selling small amounts of equity to many investors.
So now if we know the definitions of these terms we can try to find a link between crowd funding and Finance.
There are different ways how to link crow funding and finance. One of them is to finance business. Sometimes when you need a funding for your business it may be hard to get one. It might be too risky for the bank policy according to the operational, credit or finance risks. Even though it is clearly understandable that this business will work and bring a lot of money. So if we face this problem we have to find another solution and crow funding is the way to go.
People who can’t get money from banks to startup their businesses, finance a new product, or expand their operations have to try crowd funding. It’s a really good way to develop their business.
Two types of crowd funding
There are two types of crowd funding – reward based and equity based crowd funding. Reward based crowd funding is just what is says. You receive a reward of some value for making a donation to a crowd funded project.
Kickstarter, the largest crowd funding site on the Internet mentioned above, is a reward-based crowd funding operation. In 2011, rewards-based crowd funding operations reached $102 million. That was a 266% increase over rewards-based crowd funding in 2010.
Equity based crowd funding allows people to invest, even small amounts of money, in projects and, in return, receive a part of ownership of the project.
Nowadays there are a lot of TV shows like that. For example “Shark Tank” or “Dragons Den”.
There are five “sharks or dragons” who are actually really experienced and rich investors who can invest in a business or a project if they think the ROI – return of investment is high.
They are comparing a lot of things: presentation, ROI, margins etc., before they go to the total decision.
Pros and cons of crowd funding
+ Proponents of the crowd funding approach argue that it allows good ideas which do not fit the pattern required by conventional financiers to break through and attract cash through the wisdom of the crowd. If it does achieve “traction” in this way, not only can the enterprise secure seed funding to begin its project, but it may also secure evidence of backing from potential customers and benefit from word of mouth promotion in order to reach the fundraising goal.
+ Another potential positive effect is the propensity of groups to “produce an accurate aggregate prediction” about market outcomes
+ Proponents also identify a potential outcome of crowd funding as an exponential increase in available venture capital.
+ Proponents also cite that a benefit for companies receiving crowd funding support is that they retain control of their operations, as voting rights are not conveyed along with ownership when crowd funding.
– It is not always good for artists and charitable organizations, a disadvantage for business is the requirement to disclose the idea for which funding is sought in public when it is at a very early stage. And if the owner has not patented his idea. This exposes the promoter of the idea to the risk of the idea being copied and developed ahead of them by better-financed competitors.
– Managing communications with a large number of possibly disappointed investors and supporters can be a substantial, and potentially diverting, task.
According to the information above I can certainly approve that there is a strong ling between crowd funding and finance.