Crowdfunding was previously only an approach for start-ups to get up on their feet, but the method is now showing potential for established companies to shift their strategy and encourage positive and profitable change. Lauren Razavi analyses the potential of crowdfunding as both a disruptive threat and an opportunity for established companies.
Crowdfunding has been gaining more and more ground in recent years, especially among European consumers. It might seem like a trend embraced only by start-ups desperate for cash, but in reality crowdfunding is quickly becoming a useful tool to recruit and maintain an enthusiastic client base for companies across multiple industries.
We live in a world in which failure to adapt to technological advances can spell destruction for a company. But is crowdfunding a dangerous threat that start-ups will use to disrupt industry, or an opportunity for established players to make profitable changes to their process?
Alternative Finance 101
A report by CrowdfundingHub.eu identified four major types of crowdfunding:
- Donation Based crowdfunding relies on the charity of the customer base, with little to no anticipated reward. The biggest risk is that the company won’t raise the funds they need to deliver on their promises – in which case, they are responsible for either returning the donations or funnelling them into an acceptable project.
- Reward Based crowdfunding provides security to the investor by giving them a sample of the finished product. This will satisfy most consumers, who aren’t looking for a share of the profits but simply to support an idea they find compelling. However, this type of crowdfunding requires the company to actually have a sample product they can ship, which means that the initial funds will have to come from another source.
- Equity Based crowdfunding is similar to traditional investment methods in that the backer will receive a stake in the company, and possibly even some control over the final product. The primary issue with this type of crowdfunding is that in Europe the company will be subject to the regulations and policies of the European Banking Authority.
- Peer-to-Peer Lending is also similar to traditional financing – the backer will provide funds on the understanding that those funds will be paid back with interest at some point in the future. In some countries such as Italy and Belgium, peer-to-peer lending is prohibited, and there are various other restrictions in place across Europe.Each type of crowdfunding has its own pros and cons, but a major advantage of all of them is that they are more accessible to less established companies who may not be able to guarantee a consistent return on investment.
There are some concerns that the rise of crowdfunding will cause major disruption across industries. According to the world bank, 2016 saw more money raised from crowdfunding than from venture capital.
That’s bad news for investment managers – instead of paying costly legal and management fees, big investors are now choosing to cut out the middleman and interact directly with the companies they feel best align with their interests. As more and more platforms choose to cater to specific industries, investors are better able to make decisions for themselves, instead of relying on financial experts who charge fees for their knowledge.
Crowdfunding means that general consumers can now invest in local, small to medium businesses from their smartphones
The unregulated nature of the crowdfunding sector is also a cause for concern. In Europe, regulators have struggled to harmonise the challenges that crowdfunding brings with existing financial practice. In Finland, for example, there is no requirement for crowdfunders to have an MiFID licence, which means that companies who have obtained a licence are more strictly regulated than their unlicensed competitors. Other nations have been quicker to adapt – in France and the UK existing legislation has been brought smoothly up to date to be compatible with crowdfunding.
However, it can’t be denied crowdfunding is bringing in some much needed changes, especially in European markets. Traditional investors tended towards funding large, trusted companies during the financial crisis, which meant that many small to medium businesses were lagging behind in capital investment. Crowdfunding means that general consumers can now invest in local, small to medium businesses from their smartphones – and that means that those same struggling companies are able to gather the funds they need to compete in the big leagues.
Power to the People
Easy access to the internet and the simplicity of digital payment options is the driving force behind the crowdfunding boom. Europeans are demanding a more transparent financial market, and right now it seems as though crowdfunding is answering that demand. The European Crowdfunding Network hosts articles on its website guiding companies through everything from designing compelling incentives to identifying the motivations of their funders. Crowdfunding means that companies are connected to their consumer base more closely than ever. Whether that’s a curse or a blessing depends on the company’s willingness to engage with their backers.
The rise of crowdfunding presents a golden opportunity for established companies to reconnect with their audience and test the waters before fully committing to a project. Your funders will eventually become your customer base. They know exactly what they’re looking for in a project, and they are more than happy to talk about it. When you engage with your audience on this level you’re essentially bringing them on board as co-creators – and their advice can be more helpful than you’d think. Your funders might not be the most seasoned market analysts, but they can be valuable mentors and smart beta testers.
One of the major advantages is that it combines financing and marketing in one easy package. Your funders will be your biggest cheerleaders – they know every feature of your product, every drawback, every brilliant innovation. Some of them will be marketing professionals themselves. Some of them will be experts in their field who are desperate to share this helpful new tech with their colleagues. All of them will be guaranteed customers by the time your product hits the shelves.
Whether it is a threat or an opportunity for your company depends on your willingness to embrace change. Those who have so far failed to adapt to the crowdfunding trend are already suffering repercussions, but those who have taken the time to adjust their methods and bring them in line with the trend are finding that crowdfunding isn’t so scary after all – in fact, if you play your cards right, it can be an important tool for your business going forwards.