Crowdfunding: Both Edges of The Sword
Lessened barriers of entry
Startups and SMEs are trapped between a rock and a hard place.
They require funding in order to execute their business plan, yet institutions are notoriously known for declining to fund them. A lack of a credible track record is frequently cited as a reason.
Studies by the Asian Development Bank reveal a funding gap in almost all SEA economies alone: only 18.7% of total bank lending were to SMEs in Asia and the figure has been on a decline since the 2009 financial crisis. Yet even in ASEAN alone, a Deloitte report found that SMEs account for up to 60% of a country’s GDP and play a very large part in employment rates.
Over on the donation crowdfunding side, requesting help from the community has proved to be a way to get one out of a tight situation in a pinch. One such individual, Eileen Cheong from Singapore, crowdfunded to fly her father back from Tokyo after he suffered a cardiac arrest overseas
Crowdfunding has emerged as a way to get around problems presented by current financing models – or a lack thereof. While crowdfunding has been used by startups, creative projects and personal causes, it has also seen utilization in relatively niche areas like science and journalism.
Market validation and marketing buzz
Crowdfunding can be a way for startups to gauge market reception to their idea and adjust their business plan or marketing strategies. Crowdfunding is in essence a mass sales pitch to a group of their “target audience” – a group of people for whom the project addresses a need of.
With the right marketing strategy, the buzz can additionally propagate itself in the form of media coverage, attracting even more funding and interest from the community – depending on what your project is for. With accredited investors and venture capitalists constantly on the lookout for the proverbial “unicorn”, this buzz may just prove to be the big break that you are looking for.
Oculus VR was one such crowdfunded venture that was eventually acquired by Facebook for 2 billion. Another venture, the Skully AR-1 Helmet, raised a total of 15 million, of which only 2.5million of it came from an Indiegogo crowdfunding campaign. $11 million more would later come in after the helmet received Series A funding. Discounting the subsequent drama that emerged after it emerged that the founders had less than noble intentions, the project is a dream example that showcases the power of market validation through crowdfunding.
Lesser concentration of “power”
In traditional VC funding, investors fund the organization by buying equity shares – thus conferring them partial ownership of the company. This means that the VC now has a say on the company’s activities. While VCs can help fill in gaps in areas such as industry insights or experience, they may also wish to take the company in a different direction from what was originally intended. After all, the VC’s primary goal is a return on investment, and will act in a way that they feel serves their own interests – which may clash with the management’s vision.
For teams that wish to maintain more control over where the company is going, crowdfunding can be a way to get around it. On reward crowdfunding platforms, backers simply pool capital with the promise of getting a final product – there is no equity right involved, and in fact this is prohibited by the platform. Other crowdfunding methods such as debt and equity crowdfunding provide additional avenues of funding which an organization might not have been able to get.
Fintech is in a state of constant, rapid evolution. The current crowdfunding industry, run by intermediaries which have themselves caused institutions to rethink their models, may soon find themselves squirming in their seats as new developments emerge.
Failures and Scams
Crowdfunded ventures and projects have an element of risk – which has reared its ugly head countless times. It is difficult to guarantee with 100% certainty that projects are indeed going to legitimate parties. Additionally, project in the starting stages do have a high risk of failing – such as from creators underestimating production and development costs.
Even more prominent are crowdfunding scams taking advantage of society’s goodwill for selfish gains. Scams and cheats are a part of history and are seemingly an inherent aspect of human nature, driven by a desire to gain an advantage with minimal effort. In banking and finance, cheats have long existed in the form of Ponzi schemes and pyramid schemes. The rise of crypto and ICOs, particularly in 2017, opened yet another avenue for scams.
Crowdfunding is no different, with numerous documented cases of scams amongst the sea of campaigns vying for our wallets. Still, it needs to be stressed that not every failed campaign is a scam; many simply do not work out for a variety of reasons such as business missteps, shipping issues and the like. In that regard, it is no different from a startup – or any business out there.
As with investments, risks are inherent to crowdfunding. With the current crowdfunding model as it is now, individuals need to be mentally prepared to lose their contributions at any time. As such it is important to pay attention to what the project is about, such as by reading media reports and researching on what other people are saying. Geographical divides mean that if anything does go awry, it can be quite difficult to recover your contributions!
Over-reliance and distraction from bigger problems
The rise of donation crowdfunding as a solution for societal malaises may not necessarily be a good thing. Health related crowdfunding to pay off medical bills for instance is a prominent example that indicates insufficient coverage, or even gaps in insurance frameworks themselves. In the abovementioned article about Ms. Eileen Cheong, it was reported that her father did not hold a life insurance policy and claims to travel insurance were not likely to succeed as the cardiac arrest was due to a pre-existing heart condition.
Donation crowdfunding solves a problem for someone, be it soaring school fees, medical costs, or something else. However, it is but a stopgap solution for one individual. Left unchecked, cases like this will only continue to grow at an institutional level. Can we continue to say in good faith that crowdfunding is the magic bullet for all problems?
Even startups and SMEs, spurred by a constant inability to secure institutional funding, have now resorted to crowdfunding as a way to get past the traditional “gatekeeper”. However, things may be looking up. Governments such as Singapore’s are also looking for ways to bolster the growth of SMEs through their own initiatives. Institutions need to move, or risk being evicted from relevance. Many of them have realized this truth, and have begun exploring ways fill this gap, with varying degrees of progress.
Crowdfunding is fundamentally similar to investments – an element of risk is always involved, and its funders are seeking a reward at the end. The only difference at hand is the size of each funder’s investments.
The problems of the current crowdfunding models have already been demonstrated many times. It is high time to work out a new model that can truly put the “crowd” in crowdfunding, and create a safer future for both backers and creators to operate in.
What are your thoughts on the current crowdfunding model? Do share them with us!