Crowdfunding Financing Explained: All You Need To Know

the chosen crowdfunding

Financial activity depends on the environment in which a business operates. In their effort to grow and meet their needs, businesses are looking for various ways of financing. Depending on its needs, each company tries to choose the appropriate means of financing. Among others, two factors play an important role in the choice of financing a business. The first is the cost of the sources and assets of the company. The second is the expected cost that the business will have to carry in case of non-payment of its debts. Over the years and especially after 2008, when the global financial crisis began, companies, in their efforts to find financing ways and save resources, turned to new funding forms, as they realized that traditional forms were unprofitable. In this article, we will discuss what is crowdfunding

What exactly is crowdfunding?

In a simple way, crowdfunding means receiving funds from the crowd. To make the term crowdfunding even more understandable, we can describe crowdfunding as the financing of a project or an “investment” made by internet users. The total amount collected from the users financially constitutes the initial capital for the implementation of the project. Many times the investors are rewarded for their investment.

Crowdfunding birth has a long history with multiple origins. Books have been financed in a similar way for centuries. Their authors and publishers have been advertising them and asking for pre-registration to secure those wanting to buy them. In case enough people express interest then the book would be published and those who invested in it would receive its first copies. The list of registered interested parties had the power to create the necessary pressure to produce the desired work. In return, the pre-registered would get the book first. Thus, this type of transaction is an original form of crowdfunding.

In recent years, the idea of crowdfunding was born through the rapid development of the internet and especially the growth of digital internet transactions. It is considered a modern alternative form of financing that became popular with the growth of online trading and with the global financial crisis. Many businesses could not find financing and had to turn to alternative methods of financing like crowdfunding. 

Crowdfunding platforms that have gained popularity

Most crowdfunding gained a lot of popularity through the development of the internet and became widely known in the arts and music community. Starting from the 90s, the first attempts at crowdfunding were mainly for philanthropic actions. The first crowdfunding platforms which appeared were called SixDeggrees.com and AOL Instant Messenger. On these platforms, registrations of various artists began to take place. They were asking their fans to finance their new projects. The first online music campaign was in 1997 when fans of the British band Marillion raised $60,000 to fund their American tour. In the following years (from 2001 onwards), the band used crowdfunding to finance the recording and promotion of its records. In cinema, independent filmmaker Kines designed a website in 1997 for his then-unfinished film project. By early 1999 he had already raised more than $125,000.

Historically, the first recorded crowdfunding website is artistshare.net, which in 2003 financed the first artistic project through donations made by internet users for this purpose. In the mid-2000s, the first platform was created that collected money from entrepreneurs with the aim of helping developing regions around the world. This platform was named ΄΄Kiva΄΄. Kiva today is one of the most developed crowdfunding platforms, having raised around $165,000,000. The Sellaband platform that started in 2006 with a focus on the music scene was the one that controlled the crowdfunding market.

The big communities of Kickstarter and IndieGoGo

In the years 2008-2009, the Kickstarter and IndieGoGo platforms were founded. These platforms are currently two of the most widespread and popular funding platforms. The concept of these platforms is almost the same. Their goal is to fund ideas from the public and not just entrepreneurs. Their innovation is that backers won’t get their money back. In some cases, the financier may get some reward but never their money back. Finally, in October 2011, Rachel Perrie became the millionth person to start a business through the Kickstarter page.

An example of the formation of the first laws
top kickstarter projects

In 2011, the Crowdcube site was the first to fund businesses to obtain Equity Capital for the purpose of starting their operation. On 22 November 2011, the Rushmore Group secured a £1,000,000 investment from 143 investors to fund the development of a new business in London. The investment went public and in just 4 weeks a new crowdfunding record was created. This platform launched a model that could not be used in the US due to legal restrictions. On November 3, 2011, the US House of Representatives passed HR crowdfunding bill 2930 (known as the “Entrepreneur Access to Capital Act”) which would allow startups to offer and sell securities through crowdfunding websites and social media networks.

From the inception of crowdfunding until today, many success stories have been brought to life. Such a story is the creation of the Japanese band Electric Eel Shock. The guys went on a world tour raising £10,000 from 100 of their fans, who in return received invitations for their entire lives to their concerts. The remarkable thing about the story is that before this tour, they had never used crowdfunding before. They managed to sign contracts with major record companies and of course, get funding from their supporters through crowdfunding platforms.

indiegogo in demand
More great crowdfunding projects and laws of the past

One of the most well-known examples, however, is that of Barack Obama’s election campaign. In 2008 he managed to collect more than $200,000,000 through the online donations of his supporters. On April 5, 2012, Barack Obama signed into law the Jumpstart Our Business Startups. Also known as JOBS, it was a game-changer for many businesses attempting to raise capital and meet their needs. One of the most important of the law is Title III, i.e. online capital raising. It because known for the prevention of fraud and unethical non-disclosure. (Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012), which became more widely known as title “Crowdfund”. The law was created with the aim of setting guarantees for the easy increase of equity capital, especially for new small and medium enterprises, which traditionally do not have easy access to other methods of financing their businesses.

At the same time, in 2012 the Fundable platform was founded, 11 which is the first Crowdfunding platform for raising equity capital. Ordanini et al., (2011) argue that the roots of crowdfunding are not limited only to the institution of micro-financing. Collecting small amounts from a large number of people can also be applied to the world of donations and social cooperation. At the same time, crowdfunding models contain many elements of crowd-sourcing. For example, members of a community share ideas in order to solve a specific problem or make a collective effort to create pillars for the greater good. Finally, crowdfunding processes and mechanisms are directly related to social networks. In them, consumers actively participate in order to exchange information, knowledge, and opinions about various activities or products.

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