Originally, to start an enterprise you look for FFF (Family, Friends and Fools) for funding. When looking for more capital one reaches out for business angels. This all has started to change with the rise of crowdfunding.
Recently everyone has been reading news about crowdfunding and how it helps new ideas come to life and how it is disrupting the finance world. Let’s take a closer look into this phenomenon and try to understand it.
Per definition the concept is an easy one — it is the practice of funding a project or venture by raising monetary contributions from a large number of people, today often performed via Internet-mediated registries, but the concept can also be executed through mail-order subscriptions, benefit events, and other methods.
There are 4 main types of crowdfunding:
- Donation-based
- Reward-based
- Peer-to-Peer lending (where possible subdivided into consumer and business lending)
- Equity-based
Usually, equity-based, and lending-based are more effective for digital goods (apps, computer games, music, films) and these categories raise the most capital.
Donation-based and reward-based are often used for caused based campaigning (environmental, religious, art).
Funding
In theory, crowdfunding platforms could be accessed globally, but they don’t actually give access to information about the entrepreneur’s personal & business characteristics. Also, for entrepreneurs to raise money from investors outside their local community they have to show initial investments from those close-by since it indicates odds are higher for a successful venture.
In Europe, there’s no European Union-wide regulation nor taxonomy of crowdfunding – making it difficult to analyze the real status of crowdfunding on the Old Continent.
But there’s enough data to assess globally its growth and trends. It is expected that by 2020 crowdfunding will overtake venture capital as the main source of the funding. Today it reaches about $35 billion and the World Bank estimates that by 2025 it could even reach $90-95 billion, as seen in the graphs below.
It’s seen an impressive growth over the last few years and the numbers clearly show that crowdfunding is here to stay. More importantly, it may one day become the main source of funding also for startups and traditional finance market players will not be the ones defining the market.
Nowadays there are more than around 1,400 platforms active globally, so there is most certainly plenty to choose from. The massive choice makes it also increasingly important to identify which platform is the most suitable for your project.
To get an idea here a breakdown of the most funded sectors in 2014:
With these figures in mind, we plan to issue several articles focused on the Nordic/Baltic area crowdfunding platforms and we will look deeper into the trends here.
