Introduction
Often people who create the ideas or start-ups that are really needed for society and a particular industry cannot bring their project to fruition simply because of a lack of information skills. Therefore, many start-ups are wondering: how to present your innovative and promising (and even very cool) project so as to arouse interest in a potential investor? Do you have an idea for a startup but don’t have the money? Then crowdfunding will help you.
Chapter 1. What is crowdfunding?
To start with, I’d like to tell you what this concept means. Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet. Crowdfunding is a form of crowdsourcing and alternative finance. It is very effective way to get some money and, for example, in 2015, over US$34 billion was raised worldwide by crowdfunding. Crowdfunding is used by all kind of people and groups like entrepreneurs, charities, companies and privates. The different purposes wherefore crowdfunding can be used are from raising money to finance a new car or a vacation, making a movie, to the start-up of a company or developing an innovative idea. The purpose can be everything, just as long people are willing to invest into the idea.
Although similar concepts can also be executed through mail-order subscriptions, benefit events, and other methods, the term crowdfunding refers to Internet-mediated registries. This modern crowdfunding model is generally based on three types of actors: the project initiator who proposes the idea or project to be funded, individuals or groups who support the idea, and a moderating organization (the “platform”) that brings the parties together to launch the idea. Crowdfunding has been used to fund a wide range of for-profit, entrepreneurial ventures such as artistic and creative projects, medical expenses, travel, and community-oriented social entrepreneurship projects. Its use has also been criticised for funding quackery, especially costly and fraudulent cancer treatments.
Although similar concepts can also be executed through mail-order subscriptions, benefit events, and other methods, the term crowdfunding refers to Internet-mediated registries. This modern crowdfunding model is generally based on three types of actors: the project initiator who proposes the idea or project to be funded, individuals or groups who support the idea, and a moderating organization (the “platform”) that brings the parties together to launch the idea. Crowdfunding has been used to fund a wide range of for-profit, entrepreneurial ventures such as artistic and creative projects, medical expenses, travel, and community-oriented social entrepreneurship projects. Its use has also been criticised for funding quackery, especially costly and fraudulent cancer treatments.
That is, the essence of crowdfunding is that you have a good idea, but to implement it you need money, and there are ordinary people (backers) who are ready to fund your project for a certain reward (product copies, discounts on services / products). Crowdfunding is used worldwide, but is the most regulated in the US.
Chapter 2. Crowdfunding and traditional fund.
Traditional fundraising for a business project or venture encompasses pitching a few investors, banks or venture capitalists for a hefty sum. But in crowdfunding, the ‘crowd’ funds the idea or project, through an online platform, i.e. internet is used to communicate with people who can contribute in relatively small amounts in the business idea, project or venture, to help it get off the ground.
The difference between crowdfunding and traditional fund raising is that crowdfunding needs to attract a large group of people who all donate or invest a (small) amount of money to eventually reach the total amount needed. A traditional finance is mostly done by attracting one or two organizations or businesses who invest the total amount of money needed, it can also be a loan from a bank or other financing institution.
Chapter 3. Types of crowdfunding.
There are two primary types of crowdfunding in international business:
- Rewards crowdfunding: entrepreneurs presell a product or service to launch a business concept without incurring debt or sacrificing equity/shares.
- Equity crowdfunding: the backer receives shares of a company, usually in its early stages, in exchange for the money pledged.
Reward-based crowdfunding
Reward-based crowdfunding has been used for a wide range of purposes, including motion picture promotion, development, inventions development, scientific research, and civic projects. Rewards-based, or seed, crowdfunding is a type of small-business financing in which entrepreneurs solicit financial donations from individuals in return for a product or service. There are about 19 times as many rewards campaigns as there are for its closely related counterpart, equity-based crowdfunding. Business owners describe their project or business idea and fundraising goal on a crowdfunding platform. In return for donations, businesses provide rewards. For example, a jewelry designer might reward everyone who contributes $100 with an original handmade bracelet, or an inventor of solar-powered lawn mowers might give a mower to contributors at the $1,000 level. Rewards don’t have to be substantial; some businesses offer a simple handwritten thank-you note.
Pros:
- it’s one of the cheapest ways to raise capital;
- the process is simple and doesn’t require professional financial or legal help;
- you retain all equity and control in your company;
- no collateral, credit check or previous business experience is needed.
Cons:
- since you’re relying on individual donations, rewards crowdfunding isn’t the best option for businesses seeking large amounts of funding;
- if you don’t reach your goal, you may have to forfeit any amount raised.
Equity crowdfunding is the collective effort of individuals to support efforts initiated by other people or organizations through the provision of finance in the form of equity. Equity crowdfunding is when a company raises funds from a large number of investors (the crowd) in exchange for equity in that company. For the individual investor, this means that when they invest they become shareholders in the company.
What makes this different from the other types of crowdfunding? With rewards, donation and debt-based crowdfunding, when you pledge funds you do not own any part of that project or company. With equity crowdfunding, when you pledge or invest, you become a beneficial shareholder of that company and can enjoy the benefits (and risks) associated with that, outlined below.
Debt-based crowdfunding
In debt-based crowdfunding, investors are given a choice to put their money into the security of a business, a debt instrument such as corporate bonds, for example. This type of investment vehicle is issued by a company that needs to finance a planned merger deal, acquire a smaller business, etc.Another way to employ financial instruments to benefit a business is to sign a debt-based crowdfunding contract with interest-based returns.Generally, interest rates vary from the market and depend on the level of risk a certain start-up or a mature company presents.
Donation-Based Crowdfunding
Donation-based crowdfunding is a way to source money for a project by asking a large number of contributors to individually donate a small amount to it. In return, the backers may receive token rewards that increase in prestige as the size of the donation increases. For the smallest sums, however, the funder may receive nothing at all.
Sometimes referred to as rewards crowdfunding, the tokens for donations may include pre-sales of an item to be produced with the funds raised. Donation-based crowdfunding can also be used in an effort to raise funds for charitable causes. Because this sort of crowdfunding is predicated on donations, funders do not obtain any ownership or rights to the project—nor do they become creditors to the project.
Chapter 4. How Crowdfunding Works?
Crowdfunding is an emerging mode of raising finance from anyone having money, wherein entrepreneurs get an opportunity to arrange millions, from a pool of investors who are ready to invest in their business venture or project, through a crowdfunding website such as Kickstarter, Indiegogo, Peerbackers, etc.
In crowdfunding, a forum is provided to those entrepreneurs and small businessman who has an idea but seek funds to make it real. The fund seekers can make a profile and post the details of their idea, project or venture, on the website and pitch it before the potential investors, rather than raising loan from the bank.
The investors invest in those projects whose idea is one in a million and has the potential to turn out as a big hit. The amount spent by the investors in crowdfunding is usually small, but there are thousands of investors, who select from a range of projects to pledge their cash in exchange for return or without it.
Moreover, the fund seekers can also parallelly use social media, to raise funds out of their social circle of friends, relatives, colleagues and acquaintances. Now you must be wondering how these crowdfunding websites generate revenue? Well, these websites make money out of the percentage of funds so raised.
Chapter 5. International projects support platforms in Ukraine.
Prior to the establishment of domestic platforms, Ukrainians used international crowdfunding platforms such as Kickstarter, Indiegogo and GoFundMe, and continue to use them now. Kickstarter and Indiegogo are rewards-based platforms that are mostly used by business start-ups, although they also support charitable causes. The free crowdfunding platform GoFundMe has gained popularity through fundraising during the Euromaidan and the crisis in eastern Ukraine.
Kickstarter is one of the biggest names when it comes to crowdfunding, known for helping tech and creative entrepreneurs fund their projects before getting a loan or raising money for venture capital. The company has raised over $4 billion with more than 155,000 projects funded since its inception in 2009. Potential funders can browse a number of verticals from arts and film to publishing.
Kickstarter is an all or nothing platform, which means that you don’t get your funds unless you complete your campaign. It also means that the funder’s credit card won’t be charged unless you meet your campaign goal. The fee is 5% on top of processing payment charges (3- to 5-percent) per transaction. If you raise enough money, there’s a 14-day waiting period for funds.
Indiegogo users are usually creating campaigns for tech innovations, creative works, and community projects. The crowdfunding platform works similarly to Kickstarter, except it doesn’t have an exclusively all or nothing fundraising model.
Users choose between two options: fixed and flexible funding. Fixed is best for fundraisers where your project needs a certain amount of money while flexible is good for campaigns where you’ll benefit from any funding. With flexible funding, you will get your funds whether or not you meet your goal; with fixed funding, all funds are returned to your donors if you do not meet the campaign goal.
You’ve probably seen a handful of GoFundMe fundraisers on social media at one point or another for emergencies and charitable causes, but businesses can use it as well. The crowdfunding site collects a 2.9-percent processing fee and 30 cents for every donation. As it’s not an all or nothing fundraising site, you keep everything that you raise. Plus, there are zero personal campaign funding fees for those based in the United States.
This site is a good option if your fundraiser goes towards a service-based cause, such as medical needs or emergency relief. There are a few caveats, however: Conventional start-ups may not raise as much capital on GoFundMe, and it’s important to be mindful that only one in ten campaigns ever get fully funded on the site.
Chapter 6. Ukrainian crowdfunding platforms.
In recent years, several Ukrainian crowdfunding platforms have emerged to address a variety of challenges, including humanitarian assistance to victims of Euromaidan and conflict in eastern Ukraine, business start-ups and innovative projects for civil society and community development.
One of the most successful crowdfunding sites in Ukraine is biggggidea.com. It was created in 2009 to share ideas with socially active people, and is why it’s called the Big Idea. In 2012, Big Idea launched the Community Fund crowdfunding platform, which became the first platform for collective financing in Ukraine. According to the founders of the platform, it aims to implement projects that are able to provide systematic changes in society and promote economic growth of the national economy. In this way, through such platforms, people are able to finance social change. The platform features projects in health, education, literature, sports, music, science, professional travel, and journalism.
Another popular platform in Ukraine is Na-Starte. Na-Starte is a platform for financing start-ups, commercial and social projects, business ideas. Many different projects have been launched on this platform, and the leader of the project is Georgiy Deliyev’s film “Odesky Podkydysh” – UAH 3.7 million was raised for its realization. During the whole period of operation the platform has raised funds of UAH 12.2 million.
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