Part 1 – The Recent History of Crowdfunding

/ Business Law Claudius du Plooy Entrepreneurs Financing

Crowdfunding potential looms everywhere.

Imagine you could gather together all the money you have spent, and will ever spend, on coffee. Every single coffee you’ve had and will ever have. Imagine you could put all that money to use. What would you do with it?

Author David Bach described the lost opportunity costs of habitual spending by coining the phrase “latte factor.” The latte factor asks how much money is spent during a person’s life on habitual items like coffee. It implies that if we could somehow pool that money, we would have access to a serious amount of capital. Obviously, few people would cut out small luxuries, like coffee, in order to eventually, after decades, save enough capital to invest in their idea. But what if a person didn’t have to pool his/her lifetime coffee budged, but could instead entice thousands of other individuals to invest the equivalent of a week’s worth of coffee money? That would be a serious amount of capital to invest in your idea. This is the foundation behind the concept of accessing the crowd to finance a concept. This is the foundation of crowdfunding.

 

How is Crowdfunding Changing the way Individuals raise Capital?

According to the US Small Business Association, the most significant barrier to the success of new businesses and the primary reason why 50% of them fail within the first five years is undercapitalization. It is safe to say that entrepreneurs are hungry for innovative ways to raise capital. So it should come as no surprise that online tools, which allow the enterprising to tap into the crowd to raise capital, have been enthusiastically adopted by individuals around the world. Entrepreneurs, artists, philanthropists, and many others are taking advantage of an exponentially growing crowdfunding market to fund their ideas. Besides raising capital, crowdfunding campaigns also offer a way for individuals to:

  • Use the interest of their doners as a baseline valuation of the market for their ideas;
  • Use their funding totals to determine the initial value of their business, leveraging it to garner financing capital from more tradition avenues; and
  • Develop a paying customer base that will promote their ideas, fostering greater brand recognition and media attention.

 

What are the new Crowdfunding Platforms?

As the market has grown, several different types of crowdfunding platforms have emerged, each suited for particular ventures and concepts.

  • Donation crowdfunding platforms like InvestYYC, ArtMarket, and GoFundMe allow not-for-profit organizations to raise charitable contributions for specific concepts.
  • Debt crowdfunding platforms like Prosper, Funding Circle, and LendingClub allow entrepreneurs to get small, short term, low interest loans to develop local business. This model has seen extraordinary success in developing countries, where small (approximately $100) loans have allowed thousands of local businesses to develop.
  • Reward or incentive crowdfunding platforms like Kiskstarter, Indiegogo, and BoostR are the most common. They allow individuals and business to raise capital for specific concepts by offering rewards or incentives in return for individual donations.
  • Equity crowdfunding platforms like SeedUps, Katipult, and FrontFundr are a relatively recent innovation. Several jurisdictions have adopted legislation allowing businesses to seek financing through crowdfunding by offering equity interest in exchange.

 

In 2009 the crowdfunding market was estimated at $530 million but by 2020 that market is projected to grow to $100 billion. This is a innovative avenue for enterprising individuals and groups to raise much needed capital to bring their ideas to the market.

So, what would you do with all that coffee money?

 

About these authors: Claudius du Plooy has over ten years of experience in matters of business law, securities law, commercial real estate development, entertainment law and international trade law. Jovan Kljajic is a student at Du Plooy Law with an interest in entertainment, business, and intellectual property law.