Crowdfunding sources for startups
Crowdfunding emerged after 2008 as an alternative finance market. It is a way of funding where money is raised from large number of people who believe in your product or service and is generally done via the internet. According to the Massolution Crowdfunding Industry report 2015, the estimated fundraising was $34 billion globally. World Bank has estimated Crowdfunding will reach $90 billion by 2020.
Kickstarter, Indiegogo, crowdfunder, JD.com are few active Crowdfunding sites in the world, but there a number of other sources available.
- Donation- Based Crowdfunding
In this type of funding, investors do not get any monetary return. This type of model is generally used for raising money for relief work or charities. Donors can expect to get rewards in the form of acknowledgements, and gifts in kind.
- Rewards-based Crowdfunding
This type of crowd funding involves contribution made by individuals in return for a “reward”. The reward is usually the product or service offered by the company.
- Equity- Based Crowdfunding
In this type of funding Investors get an equity returns for their investments.
- Peer-to-Peer Lending
Also known as Debt-based Crowdfunding is just like a bank loan, except that lending is from a syndicate of different people. An interest is paid to lenders in this kind of arrangement.
As a start-up why you should go for crowd-funding?
Typically the initial funding for early stage ventures comes from personal savings, friends & family, credit cards etc.
Crowd-funding provides two advantages over traditional funding. First it is has low cost of capital due to a better match between the business and the investor. Second, it provides start-ups with information on market acceptance of the product, provides ideas for product modification as well as the possibility of expanding the product for other potential users.
How can startups crowdfund successfully?
As an entrepreneur when you decide to go for Crowdfunding you need to take various aspects into account to make it successful.
- Choose a crowdfunding platform that is suited to your business
As a start-up the first thing you need to determine is which type of crowdfunding is apt for your business. This would depend on the nature of your business; product or service offered & target audience.
For example, the video game Shenmue 3 raised US$6.3 million in total through a rewards based crowdfunding, which rewarded its investors with a PS4 game console.
However, if your business is a service then an equity based investment would be more appropriate, as they are more suitable for raising larger amounts of funds.
- Consider the quality the quantity of contributors
Building a contact base is important as it will bring in the capital and support required for the campaign promotion.
Fundraising goals have a better chance to success if you are able to pre-raise some funds from the existing network.
- Set an appropriate campaign duration
A campaign should be at least 30 days long, as it takes time to engage with audience and gain insight on contributors.
At the same time, you need to ensure that the campaign does not drag on for too long.
- Be creative with your perks
To be successful in crowdfunding, it is necessary to be creative with the perks being offered. Few innovative perks offered include planting trees in the name of the contributor, and credits in the film or book that they contributed to.
Crowdfunding in Singapore
Crowdfunding is quite popular in North America & Europe but when it comes to Asia it is a new concept and still at its development phase. FundedHere, MoolahSense, Crowdo, Cliquefund and Capital Match are a few of the active crowdfunding websites in Singapore.
Some of the successful crowdfunding campaigns included the Singaporean film "The Body", which raised US$29,050 through Indiegogo, and the senior-friendly smartphone Silverline, which raised US$54,001.
Singapore’s top crowdfunded campaign was Pirate3D, which raised US$1.44 million for its 3D printer. It is on a global platform.
Kickstarter opened its office in Singapore in August 2016. Around 145 projects have been launched on Kickstarter compared to 34 in the previous year by Singaporeans.
2016 saw $2.9 mn being pledged on projects started by Singapore residents on Kickstarter.
Regulations in Singapore for Crowdfunding
The New licensing rule introduced in 2016 requires Crowdfunding platforms dealing with debt & equity to obtain licence to operate. So Crowdfunding platforms will now have to apply for a capital markets services licence. As these platforms deal with retail investors, they will have to set aside a capital base of $500,000.
Similar provisions are applicable to a Crowdfunding platform that helps companies to sell equities to retail investors.
Platforms who tap accredited and institutional investors only, will now need to have a base capital requirement of $50,000. Earlier requirement of security deposit of $100,000 has been removed.
Apart from this, these platforms will need to provide alerts to investors on risk involved which has to be acknowledged by the investor.
Crowdfunding today provided a good alternative to initial seed money. It helps a star-up to jump-start a production from ideation without losing any equity. However, Crowdfunding is a one-time relationship whereas; VCs are there for a longer time.
VC apart from making investment in your business help you, mentor you and provide you the network to potential customers, buyers etc. They also help you with subsequent funding if required.
A start-up can go for Crowdfunding but for long run it is the VC that’s more helpful.
Crowdfunding will see tremendous growth in Singapore and rest of Asia over the coming years. More & more people will be attracted to Crowdfunding as they start understanding it over a period of time.