Maxime Bourdeau
Crowdfunding: a source of innovation!
Crowdfunding in brief
Have you ever heard the names KickStarter, Indiegogo or GoFundMe? All these companies offer crowdfunding to entrepreneurs and individuals. This funding method allows startups to raise money from the public sometimes in exchange for a product. The contributions are usually small and there is no certainty or guarantee: the funded project may fail. This niche market is valued in 2022 at nearly $1.67 billion USD and will grow at an annual rate of 16.7% through 2030 (GrandViewResearch, 2022). Fundraising campaigns generate an average of $7,000, but some have already reached nearly $3 million (École des entrepreneurs du Québec, 2023). These campaigns can be done on a personal basis (personal crowdfunding) or on a corporate basis (company crowdfunding).
3 types of participative financing
The first type is equity crowdfunding. Investors receive shares in a company for the right to a defined share of the profits or revenues of a certain product or service offered by the company. This type of financing is the only one that can dilute companies by offering shares to investors. This type of financing is similar to the stock market, but it is less regulated in the sense that there are fewer laws to protecting investors in the event of a failure or bankruptcy of the start-up company.
The second type of participative financing is loan financing. Several investors lend a small amount of money to a company. These loans usually have higher rates than those offered by the banks, since businesses can bypass the banking system if they do not qualify. The terms and conditions of the loans such as repayments and interest rate are defined in advance and vary from platform to platform. Depending on the options chosen, it is possible for the company to start repaying only when it becomes profitable. This option is very different from the banks that require the repayment of interest from the beginning of the loan.
The third type of crowdfunding is reward-based, also known as donation-based crowdfunding. The three sites listed at the beginning of this article fall into this category. They allow companies to set a funding goal to reach. On some platforms, money is returned to individuals if the fundraising target is not reached. When an individual funds a project, he or she can choose a contribution that includes a product that will be delivered later. Indeed, the products sold on these platforms are products in development and therefore promises a delivery without guarantee.
Advantages
– Investors cannot participate in the management of the business
– No rules are imposed on the companies other than the Income Tax Act.
– Failure is better tolerated, entrepreneurs can take more risk and develop innovative products based on new technologies.
– Take the pulse of the market by analyzing public feedback. For example, a campaign that does not reach its objective could indicate that consumers are not yet ready for this type of product
– Increase the visibility of the company and its innovation while attracting many customers or investors
– Opening to the international market
Disadvantages
– Multinational companies with advanced research and development capabilities could develop a similar product and launch it on the market before the entrepreneur who uses crowdfunding
– Requires a lot of time
– Considerable failure rate (negative image for the company)
– Requires excellent skills to communicate the benefits of the innovation. Since the product is in its development phase, it can be considered as the equivalent of selling a vision
Other alternatives to crowdfunding
Another form of business financing very similar to crowdfunding is the use of the financial capabilities of angel investors. These individuals will be willing to put up a larger amount of money on their own. However, they have much more profitability criteria than the investors coming from participatory financing. Another alternative is the use of venture capital for startups. Depending on the proposed innovation, there may be no venture capital fund willing to invest in the project. These funds are known to support startups since the managers of these funds have high growth expectations often exceeding an annual rate of return of 30%. A third alternative is to turn to the regular banking system. However, not all entrepreneurs have access to these sources of financing at reasonable rates so the potential to develop an innovative product may be limited when this source of financing is used.
Steps to a successful crowdfunding campaign
Do you have an idea for an innovation that you would like to launch to the general public? Socio-financing could prove to be an advantage in order to raise money to propel your project. Here are the main steps to follow:
- Evaluate the capacities of the company and the project
- Describe the benefits or goods that the investors will receive
- Share the crowdfunding campaign to gain maximum visibility
- Reach the funding target
- Deliver the product to investors within the project timeline
No matter if you are an entrepreneur or an investor, don’t hesitate to always consider crowdfunding, you are helping to develop the innovation ecosystem!
References
BDC. (2023). Sociofinancement. https://www.bdc.ca/fr/articles-outils/boite-outils-entrepreneur/gabarits-documents-guides-affaires/glossaire/sociofinancement
École des entrepreneurs du Québec. (2023). SOCIOFINANCEMENT POUR MON ENTREPRISE : À SAVOIR AVANT DE SE LANCER… https://eequebec.com/sociofinancement-pour-mon-entreprise-pour-quoi-et-comment/
GrandViewResearch. (2022). Crowdfunding Market Size, Share & Trends Analysis Report By Type (Equity-based, Debt-based) By Application (Food & Beverage, Technology, Media, Healthcare, Real Estate), By Region, And Segment Forecasts, 2023 – 2030. https://www.grandviewresearch.com/industry-analysis/crowdfunding-market-report
Nordicity. (2012). Crowdfunding in a Canadian Context. https://www.nordicity.com/de/cache/work/77/CMF-%20Crowdfunding%20in%20Canada%202012.pdf