Last week I introduced this topic of the power of crowdfunding potential for the Caribbean. I explored the similarities of crowdfunding with our more familiar community self funding models like the partner and meeting turn and sou sou, asu, box, sangue and box hand. This week I continue my account by sharing the crowdfunding models and how this alternative finance method works.
There are four models of crowdfunding, and the names are self explanatory: donations, rewards, equity and loans.
Donations-based crowdfunding primarily supports fundraising for charities, individuals and other worthy causes and ventures. It is typified by the contributors making donations with no direct return other than the satisfaction of knowing that they are supporting the campaign creator or it is a cause that they believe in. By leveraging crowdfunding the traditional fundraising causes can be taken beyond your immediate community to reach a global community of supporters and well wishers.
Rewards-based crowdfunding facilitates the pre-selling of goods and services by entrepreneurs or those with proof of concept stage ideas who want to test and validate their concept. This mode of crowdfunding enables the campaign creator to design a suite of rewards that will be offered to the contributors depending on the level of giving. The value to the campaign creator is not just the funding they will receive. They also get the opportunity to validate their product concept, and in some cases to even co-create their products with their contributors. After the campaign closes and the money is exchanged, the obligation of the campaign creators continues until they deliver all the rewards to their funders.
Lending-based crowdfunding enables entrepreneurs or individuals to borrow small amounts from others which then get pooled to fund their needs and which is repaid with interest. The contributors in this case must be aware of the risk of default which they will bear. The platform plays a central role in repaying principal and interest throughout the term of the loan. This form of crowdfunding dominates the crowdfunding activity globally. In recent times, it has been attracting institutional capital from players like Banks and Pension Funds who are seeking out the lower cost administration of the online model.
Equity-based crowdfunding offers the contributors an ownership stake in the company in exchange for their investment. By its very nature, this type of online solicitation for investment brings some complexities that require greater due diligence by both the platform and the investors and it also requires robust governance structures to perfect the interest of the participants and as a safeguard to the various stakeholders. Typically to facilitate its implementation there is a need to modify company law to make it favorable towards permitting multiple small investors in private companies.
HOW CROWDFUNDING WORKS?
Crowdfunding starts with a need which becomes centric to creating a crowdfunding campaign that includes a funding goal, timeline, and story told by script, pictures and most times video. Like any product launch, the campaign should be supported with a marketing plan that formulates tactics and approaches to build awareness and get the campaign funded. The campaign is then hosted on a crowdfunding platform like pitchandchoose.com, which serves as an intermediary to govern the process, connecting the campaign creator with their crowd, and also facilitating the movement of payment from contributor to the campaign creator.
Campaign creators are guided to initiate the promotion of the campaign before going live. This becomes a key strategy to encourage the influx of donations from the moment the campaign is launched. And throughout the campaign your game plan will be to promote, promote, promote, so as to bring as many persons to the site to view the project and to build awareness and support.
Depending on the site policy you will be asked to choose your funding mode which can be Keep It All (KIA – you keep what you raise), or All Or Nothing (AON – you only receive the funds if you meet your funding goal). Most sites accept donations by credit or debit card, and the amount paid out to the campaign creator will be net of the fees charged by the crowdfunding site and the payment processor.
CROWDFUNDING, THE ENABLERS
Crowdfunding has been growing exponentially across the globe and its impact on the global economies has earned for it the passionate support of policy makers and the media which has helped to entrench it as a mainstream method of raising finance especially for businesses. Some of the key enablers to facilitate its adoption include:
1. The awareness
2. Crowdfunding “Know How”
3. Social Media for business “Know How”
4. Community Engagement
5. Favorable regulatory environment to support democratization of finance.
Before the advent of pitchandchoose.com, the Caribbean market was unserved and there was, and still is, very little knowledge of this method of financing. We therefore are advocating to build the awareness and to urge for the adoption of crowdfunding because of the value it promises to deliver for our market. Our objective now is to build the awareness of this $34 Billion (2015) industry that is growing exponentially, and also to get our communities engaging through the use of social media as a business tool.
THE BOTTOM LINE IS that if we are to benefit from the power of crowdfunding to attract capital for our businesses and our projects, we must start now to understand how it works and to actively engage in the use of social media for building community engagement. With a handle on these, we will then be positioned to successfully crowdfund projects and causes that will lead to an inflow of funds to our markets. The end game is to unleash new triggers to stimulate our economies and create a positive impact on the “rise of the rest.”
Originally posted in Stabroek News
FundRiseHERTM is a crowdfunded grant that is created to foster the growth of women entrepreneurs in the Caribbean. Learn more at fundriseher.com