If you don’t know what crowdfunding is or how it works, don’t feel bad. I am interning at an equity crowdfunding platform, and before I started I wasn’t exactly sure how it worked, either. However, now that I’ve spent almost three weeks here I have learned a lot and am here to enlighten you. Welcome to Crowdfunding 101.
What is it?
When an entrepreneur has an idea for a project or new business, they need money (and usually lots of it) to get it started. However, not everyone has access to a network of rich investors or are given small loans of one million dollars. So, what do they do? Well, there are a couple of options: venture capitalism and crowdfunding.
Venture Capitalism is when an entrepreneur either searches for a bank to give them a large loan (which can be very, very risky for your credit) or search for an investor (who will probably take a large stake in your company, meaning you lose control over the plans for your business). If you’ve ever watched “Shark Tank” or seen the movie “Joy” you have seen in action what these entrepreneurs must do, and from the investor perspective you have seen that they must constantly be bothered by entrepreneurs even though they may not have any interest in what their project is.
How It Works
Crowdfunding makes entrepreneurial endeavors easier for both entrepreneurs and investors. Instead of relying solely on an investor or one large loan, entrepreneurs receive funds through the investments of multiple, small contributors. So one project could have, for example, ten different investors since the investments are of a smaller size.
Crowdfunding platforms like Socios Inversores are the link between the entrepreneurs and the investors, making the process of starting a company much easier and faster, too. All entrepreneurs have to do is register their idea on the platform’s website and it is then evaluated by the platform. If it goes through, the project is posted on the website, being advertised to interested investors. In order to invest, interested investors simply have to register on the website and they are then able to have more information about projects that they are interested in. Because of how easy crowdfunding platforms make this process, crowdfunding gives anyone the opportunity to start a business or be in an investor if they wish.
Why use Crowdfunding?
Not only does crowdfunding make it easier to get a project started, it also speeds up the process and allows for more flexibility when creating a business plan. By eliminating the need to search and search for a source of funds, entrepreneurs receive funds a lot faster since the investors investors are actively looking for projects that interest them because they want to invest and support your idea.
There are three types of crowdfunding to choose from: equity-, debt-, and reward-based. Each platform is a different kind. For example, Socios Inversores is an equity platform while Emprestamo is a debt-based one. Regardless of which form you decide to go with, entrepreneurs will have more control over what happens with their business and can simply take the advice from their investors if they wish. Of course there are some things that are agreed upon between entrepreneur and investor, but overall the agreement is much more flexible and less binding than those that are born out of venture capitalism.
Trends in Crowdfunding
Because of these benefits, crowdfunding has been growing in popularity more and more each year. However, as demand increases it can be difficult for all of the platforms present in the European Union to attract business to their companies. More and more platforms are popping up across Europe, and each country has different regulations. Even worse, large companies are starting to use crowdfunding to gauge the public’s interest on small projects, going against the original reason crowdfunding came to be. This is why there is a need for a common framework of regulations for crowdfunding in the E.U.
Entrepreneurship is an exciting area of business because you never know what will come next. Crowdfunding is now a big part of this industry, growing more and more in popularity each year. It’s been really cool being able to learn so much about this industry and seeing how it all plays out behind the scenes of a crowdfunding platform for myself. I hope to be able to see the crowdfunding industry grow and flourish even more here in the EU in the future.