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Crowdfunding: A New Type Of Investment

Crowdfunding: A New Type Of Investment


In this era of collaborative economies, crowdfunding platforms are very successful. Research shows that over 80% of the population approve of economic collaboration. Crowdfunding is an integral part of this economic system based on sharing, as it means anyone can be project leader and investor at the same time. If you are not sure how crowdfunding works, here are some explanations of the growing phenomenon:  

Crowdfunding: everyone can join

Crowdfunding is a community- or solidarity-based form of financing.

With banks at a standstill, new platforms are being developed around the world. Crowdfunding is now present in every sector and is quickly becoming just another source of financing, except that it is easier and more popular than other sources. 

The term crowdfunding does really mean that crowds, i.e., everyone, can share ownership. The theory is that anyone can invest in a project, even with a small amount of capital, and this explains why crowdfunding is so popular and is gaining more and more adepts. Crowdfunding is based on a wide community of people (and the instrumental role of social networks is no coincidence) joining in a project, and on large numbers of people contributing to raise the necessary funds. There are no prerequisites to launching a campaign (other than being registered on a platform accepting your project), and websites are accessible to all.

Crowdfunding was created to overcome a structural issue    

There is a reason why the first crowdfunding websites appeared during economic crises. The first crowdfunding platforms were launched in the United States at the beginning of the century. Banks were suffering and projects leaders were increasingly struggling to raise funds. People suddenly realised that a ‘crowd’ could easily replace banks and financing institutions. 

The principle is that any internet user who likes a project can decide to get involved financially by lending or giving money. Another reason for the system’s incredible success is how little you need to take part. Anyone interested can offer as little as 5 or 10€ and help make the project viable.

The result is a win-win situation where some find an attractive source of funding and others an easy way to finance a project.  

A win-win situation in several ways

Remember that a crowdfunding platform is a sort of market where some people lead projects and others finance them. One of the main reasons for the success of the system is that both groups benefit in several ways.

For example, investors can choose projects they really care about, decide how much they want to invest, and what they are hoping to gain. They might opt for a simple reward (a gift card or a free meal, etc.), or they might want a sample of the product, or they might ask to be paid an interest rate.

As investors join the project by giving or lending money, they can expect an attractive return on investment.

As for project leaders, whether or not banks have turned them down, platforms offer them a lighter procedure. The usual heavy documents to be filed are replaced on crowdfunding platforms by a simple detailed presentation of the project and its origins, so that everything depends on how good they are at convincing a particular group of people. Furthermore, if the project finds enough investors, project leaders benefit by getting free exposure on the website and in the press which is always happy to share success stories found on crowdfunding sites. 

As well as offering an easier procedure, crowdfunding platforms are fantastic for project leaders because they help them efficiently test the market even before they launch their product or service. Obviously, if they struggle to find web users willing to invest, they will realise that their project is not ready yet and that they need to improve it. This is another way crowdfunding is really an excellent preparation for a market launch, and helps projects find their public. 

Different platforms for specific projects

The vogue for traditional crowdfunding platforms has led to specialised platforms being created. The new trend is in platforms dedicated to a certain type of project. Nowadays you can find just about any kind of platform: some specialise in start-ups, like Kickstarter, others in humanitarian projects, such as Arizuka, or in artistic projects (MyMajorCompany for example). 

There are platforms reserved for real estate projects as well, which aim for a different kind of clients, who usually invest in more traditional institutions.

That said, although some platforms boast of very attractive returns of up to 10%, it is important to examine each project thoroughly.

Just like with any other investment, there are risks, and a naive investor may well fall into avoidable traps. It is worth remembering that attractive rates are only potentially enticing earnings, and are not guaranteed.

The risk is greater because it is so easy and tempting to get started (you need between 500 and 3,000 euros).

Real estate can be even riskier than other sectors because investors can face so many problems in the building trade (contractors going bankrupt, homes not selling).

Before you decide to get involved in a project you like, take the time to analyse it in detail, and only then will you potentially benefit from the many advantages of crowdfunding.

Last Update on 14/06/16

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