What is Crowdfunding?
Crowdfunding is the process of collecting money from large amounts of people, to finance a particular project. The method makes use of vast networks of people and crowdfunding websites to bring investors and entrepreneurs together for a particular cause.
The young and growing market continues to transform how people behave with their money. It also presents an opportunity for small investors to participate in big projects that would most of the time be the domain of people with huge chunks of money.
Crowdfunding is different from the mainstream approach of raising funds. Traditionally, you would need to come up with a business plan, market research, and prototypes and then try to sell the idea to a pool of wealthy individuals or institutions.
However, with crowdfunding platforms, entrepreneurs are normally given an opportunity in front of more interested parties to sell an idea.
Crowdfunding market is growing rapidly as more people look for ways to invest in projects that have the potential to generate more returns in future. Estimates indicate that the market could be worth more than $300 billion in the next few years.
How Crowdfunding Works
Crowdfunding is essentially the modern way of raising funds. It is an exciting prospect that gives entrepreneurs who are short of funds an opportunity to raise some capital and bring their ideas to fruition. It also provides existing businesses an opportunity to have wealthy individuals as their backers in the industry.
There are websites online specifically dedicated to the business of crowdfunding. What these sites do is they offer a platform where entrepreneurs meet potential investors. People are required to list their businesses, what they do and the amount of money they wish to raise.
Projects listed in crowdfunding sites range from community-based projects to sophisticated projects that require a lot of funds. Not all projects are usually accepted in crowdfunding sites. Each site comes with its set of rules and requirements for listing.
Would-be investors are required to go through the projects and invest in those they believe meet their investment strategy. There is usually a payment option that allows the investor to make a contribution to after selecting a project.
Once a project generates the targeted amount, the owner can withdraw the amount after deduction of campaign fees of between 1% and 3% depending on crowdfunding site.
Crowdfunding provides a way for startups and businesses in early stages of growth to access additional cash that would be hard to find most of the time. A successful crowdfunding campaign will not only provide cash but create a base of customers who feel as though they have stakes in the company and would do anything to ensure it succeeds.
Crowdfunding in some cases enables the raising of cash without having to give up some equity that could be valuable in the long run. Donation-based crowdfunding is another effective way of raising funds without having to accumulate debt.
Starting a company can be very risky and challenging. In addition to having to look for funds, there are always expenses that need to be paid and challenges in market validation. Launching a crowdfunding campaign can help hedge the risks.
In the early stages of development, businesses struggle to receive sufficient market validation. Crowdfunding makes it possible as pitching an idea to investors goes a long way in getting a word out to other people thus growing its popularity.
Crowdfunding platforms have helped businesses receive thousands of organic visits from unique users and potential funders.
When money is at stake, anything can happen. Crowdfunding at times flop on entrepreneur’s failure to tell an engaging story or convince investors that the idea is worth investing. Failed projects most of the time risk damaging the reputation of a business, especially if it is just starting.
Crowdfunding are not necessarily easier processes to go through compared to traditional ways of raising funds. There is always the risk of funds being returned to investors should campaign fail to generate the targeted amount. The situation could get worse on raising a certain amount of money, only to realize that it undervalues the company.
Posting a business idea on a crowdfunding site increases the risk of it being copied and implemented by other people.
Tips for a Successful Crowdfunding Campaign
Before venturing into the crowdfunding business it is always important to be clear on the total amount that needs to be raised and why. Helping the crowd understand why the funds are needed and how they will help the business is of utmost importance if the campaign is to be a success.
Investors are likely to jump into a business that they know the entrepreneur also has some of his money at stake. It is thus important to demonstrate that you have some skin in the game to alleviate any concerns that investors might have.
Having a small network of enthusiastic friends and family willing to help, can also go a long way in urging other people to raise funds for the cause.
Spending more time online while a crowdfunding campaign is running could come into play as a way of building interest and attracting more investors. Being active on social media sites is one of the most effective ways of popularizing a campaign.
How Crowdfunding Sites Make Money
Crowdfunding sites make money in charging a small amount as fees on every campaign that raises funds on the platform. Most sites charge a 5% fee on the total amount raised in ‘all or nothing campaigns’ that require entrepreneurs to hit their initial target before they can access the amount raised.
‘Keep what you raise’ campaigns allows people to keep whatever amount is raised even if the target is not reached. In return, some platforms charge a fee of 8-10% on the total amount withdrawn.
Some platforms also charge a payment processing fee which averages 3%, allowing them to generate additional funds.
Free Crowdfunding Platforms
There are platforms that allow people to raise funds at no extra cost. Such platforms offer crowdfunding service with the intention of collecting email addresses for developing relationships with individuals interested in fundraisers.
Crowdfunding also allows such platforms to gather data that can be used to improve marketing efforts in future. Free crowdfunding services may also allow such platforms to learn how to effectively convert people to a paid platform.
Indiegogo Life offers free crowdfunding services as a way of generating more internet traffic that can be monetized. The more the traffic, the higher the amount of revenue, the platform is able to receive from advertising campaigns.
Crowdfunding models in Singapore
Crowdfunding appears to have taken off in Singapore even though the market is still new and in early stages of development in most parts of Asia. The market has become a go to place for entrepreneurs and investors wishing to raise capital either for starting or expanding a business.
There are four types of crowdfunding models in the country.
Donation-based crowdfunding: In this case, people and investors donate to a particular project without requiring anything in return for the support.
Reward-based crowdfunding: Before making an investment, contributors are normally promised a commodity for their investment. The reward can be in the form of the services that the project plans to offer or a share of the profits generated in future.
Lending-based crowdfunding: Contributors in this case act as a bank or lending institutions as any money contributed earns interest, paid in the long run.
Equity based crowdfunding: Contributors invest in an opportunity in exchange of equity. With these model, money is normally exchanged for a share of a business project or venture. If the business is successful, the invested amount most of the times gains in value. If not an investors always stands the risk of losing any invested funds.
Other Crowdfunding sites in Singapore
Founded in 2013, MoolahSense is one of the biggest crowdfunding platforms in Singapore. The platform provides a peer-to-peer lending platform that connects SME’s with investors. It also allows investors to invest in local businesses for fixed returns.
MoolahSense reviews all applications for businesses wishing to raise funds through crowdfunding before allowing them to list. Once listed, investors can submit offers for businesses, they wish to invest in, for as little as S$500
FundedHere was the first crowdfunding platform to launch in Singapore. The platform is regulated by the Monetary Authority of Singapore and has built an ecosystem for investors and businesses to leverage the capital markets.
Startups and SMEs which wish to be listed in the platform have to be Singapore incorporated and have been in operation for more than 3 months. The businesses must also have a minimum of 1 Singaporean founder or beneficial owner. They must also have a minimum paid-up capital of S$500,000.
Listed companies looking to raise funds in FundedHere must be majority owned by Singaporeans. They must also not be in SGX whitelist and possess positive tangible Assets.
Crowdo is a regional crowdfunding platform that is regulated by MAS, Financial Services Authority of Indonesia as well as Securities Commission of Malaysia. The platform offers a peer-to-business investing services, whereby businesses trying to raise funds are connected with investors looking to invest in promising ideas. Anyone can directly invest in P2B and support local SMEs
Crowdo also uses the internet and social media to connect businesses trying to raise funds with prospective investors in what it calls Equity Crowdfunding. The service provides a simple and better way of raising funds online
CoAssets is a crowdfunding platform with offices in Singapore, Australia, Malaysia, China and Indonesia. The platform brings together real estate developers businesses and investors together. It is also the first real estate crowdfunding and group buying platform in the region.
Crowdfunding Regulation in Singapore
To operate a crowdfunding platform, an operator needs a Capital Markets Services License mandated under the Securities and Futures Act. Operators are also required to set aside S$500,000 as a deposit before any license of operation is issued.
The Monetary Authority of Singapore regulates all crowdfunding projects in the country. The regulator is currently working on new measures that will make it easier for startups, small and medium enterprises to raise funds.
One of the MAS’ measures involves simplifying checks on investors and reducing financial requirements for platform operators. The authority plans to simplify the pre-qualifications for investors that meet certain requirements on financial competence. Pre-qualifications currently require issuers raising less than S$5 million with 12 months to do so without a prospectus.
The primary goal is to improve companies access to securities-based crowdfunding while also guaranteeing investors safeguards. Platform operators will be required to document and disclose some of the key risks associated with their crowdfunding investments as part of new proposed measures. They will also have to obtain investors acknowledgment that they have read and understood the risks involved.
MAS is also in the process of reducing financial requirements for platforms that seek to raise funds through securities-based crowdfunding from accredited institutional investors. The regulator is to publish new guidelines on securities based crowdfunding-related advertising as well as frequently asked questions.
Emerging forms of crowdfunding involving digital tokens such as cryptocurrencies are set to be regulated by MAS. The regulator is swinging into action, after becoming increasingly concerned by the number of Initial coin offerings that are cropping up each day.
MAS stance on the matter is that firms that are planning to issue digital tokens structured as forms of securities will have to issue prospectus as part of the offer. However, issuers may skip this option if their offers are small, private placements or accredited to institutional investors. If such tokens are to be traded on secondary platforms then they will have to be approved by the agency.
This article first appeared on ZUU online.
ZUUonline is an Asia-based financial education online portal. Founded in Japan by Kazumasa Tomita, a former private banker at Nomura Securities, the portal seeks to fill the information gap between institutional research houses and the private investor.
(By Neha Gupta)
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