Crowdfunding offers start-ups another financing option. However, there are great differences in the design, not every form is suitable for every company.
At the latest since 2009, when the internet portal Kickstarter made crowdfunding a mass phenomenon, start-ups also have another financing option. In Germany, for example, Panono, a company that developed a camera ball; or Bonaverde, a start-up with plans to develop a new type of coffee machine. Panono received 920,000 euros, Bonaverde 500,000 euros. More recently, neobank Tomorrow released a funding round to the crowd and raised around three million euros. "These 2,000 investors are like ambassadors for us," co-founder Michael Schweikart exulted in the Startbase interview. Tomorrow can expect useful feedback from them to further improve its own product, he said.
But some of these examples show how delicate the model is: both Panono and Bonaverde have since gone bankrupt. It's a fate shared by around a third of all crowdfunded startups, as finance expert Markus Petry of Wiesbaden Business School warned on Springer Professional's blog last month. Which advantages and disadvantages there are in crowdfunding and how such a process is best run, that is why founders should take a very close look. An overview of the key points.
What forms of crowdfunding are there?
In fact, not all crowdfunding is the same; there are four different variants. These differ mainly in what the investor can expect for his money.
Donation crowdfunding: here, backers get nothing back at all, they give their money to the crowdfunding campaign unconditionally. This variant is, however, rather unattractive for start-ups with an interest in profit; non-profit organisations are more likely to use it, such as the initiative "My Basic Income", which wants to use donations to finance crowdfunding experiments with an unconditional basic income.
Rewarding crowdfunding: In this variant, the investor receives a fixed return for his trust. Very often, this involves products that are funded by the campaign. Artists often use this approach by making crowdfunded albums and films available to backers exclusively or at least as a priority. Startups that want to create products for end consumers can also use this. A few years ago, for example, the e-skateboard company Mellow Boards financed itself in this way.
Lending crowdfunding: In so-called crowdlending, entrepreneurs have to pay back the money they put in at some point. There are different models, but often the startups have to pay interest on the capital invested, possibly regardless of success. Usually, these interest rates are quite high; after all, loans to emerging companies tend to be risky. Panono, for example, raised money again in 2014 - after the first funding round - this time via crowdlending.
Crowdinvesting: Here, investors receive a direct share in the company's success in return for their money. The investment can be treated as a subordinated loan, which would effectively make it part of the company's equity. Alternatively, the investors can also receive shares in the company directly and thus profit, for example, in the event of a possible exit. Tomorrow also used this option, and its crowd investors now have a six percent stake in the fintech.
When can crowdfunding work?
Crowdfunding is especially worthwhile for founders who have difficulty getting money elsewhere. When bank and other capital providers shy away, it allows them to pitch their ideas directly to potential customers or to people who share their vision. Just because a startup can't get capital directly doesn't necessarily mean the idea is no good. Venture capitalists, for example, often have clear portfolios and evaluation schemes, and most are upfront about not investing in every idea that might work. Banks are more cautious anyway, often demanding collateral for loans that young founders can't provide.
One advantage of crowdfunding is direct contact with potential customers if the start-up produces an end-user product. This allows the product developers to find out how well their idea is received and whether there is room for improvement.
What appeals to many founders is that, depending on the crowdfunding form, they remain independent. Unlike venture capitalists, the investors who come through the platforms don't necessarily get shares in the company, nor do they demand accountability comparable to that of, say, a bank.
What can cause crowdfunding to fail?
The same points in favor of moving into this form of financing also work against it. There are often reasons why neither banks nor VCs want to give money to a start-up; perhaps the idea is simply no good when several experts wave it off. Crowdinvestors also can't bring the same expertise to the company as larger backers who have brought many startups to market before. "Investors can hardly assess the validity of the business model and the prospects of success of the financed start-up themselves and are dependent on the risk assessment of the platform operators," also warns finance expert Markus Petry in his blog post.
But even if the founders firmly believe in their idea, there are further difficulties. If you want to inspire the masses, it will be difficult to do so with hard business figures; instead, crowdfunding platforms need enthusiasm and excitement to achieve goals.
Speaking of goals: Often crowdfunding platforms stipulate that prospects give a clear number they want to collect. With most providers, all money is forfeited if this target is not reached. In other words, if you can only raise 490,000 of the 500,000 euros you are aiming for, you will end up empty-handed. So anyone who tries crowdfunding should think very carefully about how much money they need.
What platforms are there?
The largest providers worldwide are the American platforms Kickstarter and Indiegogo, which have also been usable in Germany for a few years. Kickstarter is still the gold standard of the industry, but may not be interesting for every user due to its sheer size. Indiegogo has the advantage that the site does not insist on a funding goal to be reached.
The German primus is Startnext, which - similar to Kickstarter and Indiegogo - is open to any kind of crowdfunding, both for artists and entrepreneurs. In this country, there are also a number of crowdinvesting platforms, such as Seedmatch, Companisto and Innovestment.
With Venturate, there is also a provider on the market that offers "curated crowdfunding". There, there is a deal captain for each project - usually a business angel - who reviews the start-up and negotiates the valuation, which is the basis for all further investments.
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