A new scenario for crowdfunding

Manuel Romera. Professor. IE Business School

30 April 2014

Crowdfunding is an unstoppable movement which moves over 2,000 million dollars per annum worldwide. Moreover, although it entails a certain amount of risk, it allows us to think that it is possible to make the world a better place.

Crowdfunding is a hybrid tool that lies somewhere between investment and donation. It is aimed at enabling an organization, company or project to receive funding that will help it achieve its objectives.  It is based on a system whereby a large number of people, using the web or a platform (but usually online), contribute small quantities of money on a collective basis to projects that they consider attractive, motivated by more than pure financial profit.

Interesting examples of crowdfunding include investment in artists who seek support from their followers, political campaigns, funding debt, housing, schools, clinics, or even business start-ups.

In order to regulate crowdfunding the Spanish government is currently developing a law which basically consists of ensuring that crowdfunding platforms are supervised by the National Commission for Finance Markets, and are placed on a public register. They will also have to present accounts and name those responsible for the organization. Nevertheless, these platforms do not work like a financial consulting or investment services, but rather they simply serve as an interface where investors can find companies or projects that need funding.

Hence, the regulator wants to improve levels of transparency and protect the rights of those involved in terms of information and assumption of risk. There will also be explicit information on the fact that investors are not protected by any kind of investment guarantee fund.

Moreover there are quantitative limits which limit investment in any one project to €3,000 Euros, or to €6,000 euros per year per platform. These quantitative limits are controversial, given that the government says that they are to avoid scams, but I believe that this will be difficult to achieve anyway, and that all it will do is make it extremely difficult to get the amount of money needed to fund your average project.

Bearing in mind that the majority of start-ups fail at the beginning, you have to understand that this type of investment involves a very high level of risk. At the moment crowdfunding moves 20 million euros per year in Spain, far less than other, more developed markets. Studies confirm that over 2,000 million dollars are now being moved each year worldwide via 300,000 crowdfunding platforms.

This type of funding has many advantages. In addition to raising funds, it is a way to make a business project public and leave a record of the level of success it attained.   Hence, the money raised is the best gauge of its potential. If it get all the money it needs, that is a clear sign that the idea is a good one and the project is likely to be successful.

This innovative system based on human relations should not be regarded as the perfect solution, or as a substitute for traditional funding and investment channels, but rather as a tool that permits the investor to seek not only financial profit, but also a better world. And they do say that good ideas are what make the world go round… 

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