Crowdfunding Basics

The term ‘crowd’ has been a buzzword for the past few years. The term commonly goes around with the attached verb, implying that everyone is participating in a particular activity. Now, that may not sound like something new. But in the age of the internet and mass social media, the term evokes the image of unprecedented level of collaboration by the public in supporting individual or community based initiatives. What you have is a plethora of  startups and internet celebrities such as Kickstarter or Uber which are based entirely on this mechanism.

Narrowing down the buzzword ‘crowd’  and you get crowdfunding. Crowdfunding is a funding method that allows for a party or individual to raise funds through the members of the public. Again, it’s not entirely unique considering most communities do get together to pool funds for supporting a cause or even a business (such practices are common amongst family and friends). However, the method on which the activity takes place has been revolutionised by the internet, social media and mobile technology. The process of raising funds from the crowd therefore takes a different medium and momentum. It’s easy, fast, transparent and VERY accessible; making it the favourite tool for empowering capital and bringing inclusiveness to the economy.

It is also important to note that in crowdfunding, the “crowd” decides where their money goes. There are few crowdfunding models out there, where the entrepreneurs and investors alike can partake in. Here are the four different types of crowdfunding:

Donation Crowdfunding

A company can raise funding in the form of donations from the crowd. The donation Crowdfunding model the participant or funder does not get anything back from aiding to the financing amount raised.

It is a simple model that has been around for centuries. Paired with technology, the potential for Donation crowdfunding especially in disaster relief is proving to be very effective. For example, Facebook raised $10 Million within 2 days from donations from their users for the Nepal Earthquake that happened last year.

Reward Crowdfunding

The reward Crowdfunding model is by far the most prevalent and mainstream type of Crowdfunding, with the likes of Kickstarter being the biggest player. When companies ask for funding, they allocate an incentive for the backers to give a certain amount of cash. Anyone who has seen a Kickstarter campaign would notice that if an individual had given a certain amount of money to the campaign he/she would get an exclusive and tangible product or service in return. The larger the contribution, the better the reward.

Debt Crowdfunding

A company that seeks to raise funds can choose to take a loan from the crowd to finance their project. Usually this is interest based, meaning that the investor can get returns in the form of interest. However, there are a few players in the market that offer zero interest loans or Islamic based lending models.

Equity Crowdfunding

Equity Crowdfunding is when a company offers equity in return for financing. Investors would get a stake in the business based on the proportion of his/her contribution. This means that the investor is entitled to the company’s profit. Equity Crowdfunding is for investors who can wait for a medium to long term exit, and for companies who are willing to give away some equity to their investors.

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Is Crowdfunding here to stay?

Short answer : YES! The long answer, crowdfunders in 2015 raised USD 34.4 Billion  worldwide according to the 2015 Massolution Report. In South East Asia alone, the potential market for crowdfunding is expected to grow to USD 8.9 billion by 2025.

It’s gaining so much momentum that forecasts even state that Crowdfunding could overtake Venture Capital in 2016.

Malaysia is the first country to regulate equity crowdfunding in South East Asia. We can expect further growth in the Crowdfunding industry locally as other countries in the region continue to follow.

Although crowdfunding is still new in the country, but the potential is vast. Entrepreneurs should look more into crowdfunding as an alternative means to raise funds; and at the same time we hope to see the investor community to embrace the opportunity and not miss out on the next Google or Grabtaxi.

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