Crowdfunding: a brief overview

By Catherine Rowell

Once seen as a subject to be met with caution, crowdfunding has been increasing in popularity, providing an alternative method of supporting SMEs and businesses seeking to get off the ground and gain financial investment from a number of sources to develop business operations. With over 500 crowdfunding platforms up and running worldwide, we take a brief look at how crowdfunding has developed and how it can benefit small businesses and entrepreneurs.

Different models

Three different types of crowdfunding have been established, providing a number of advantages for entrepreneurs. One is where donations are supplied by individuals, with no return on investment. The second model is increasingly favoured, where investors receive certain benefits in return, such as a discount on certain products or future services. One such company which has recently seen the benefits of such a model is Brewdog, which is now valued at £1 billion. Thirdly, there is now an established equity model, where investors are able to place equity within the business in return of placing a significant financial investment.

Advantages of crowdfunding

Crowdfunding will undoubtedly spread the word of a business and raise its profile, garnering the attention of investors and drive audience engagement. The move will also provide essential feedback where necessary, in order for a business to successfully enter certain markets. Through crowdfunding, entrepreneurs can raise their reputation, put across their business model, sell equity and gain increased benefits, but also creates excitement among investors if there is a strong business case or innovation to invest in.

Challenges of crowdfunding

Several challenges still remain with crowdfunding, where the most common is the violation of intellectual property. Businesses are not protected from their products or business model becoming copied or replicated by competitors, unless the business or product is patented or businesses have gained copyright permissions.

In addition, to not succeed in a crowdfunding campaign could result in a loss of reputation and investor interest for businesses, creating long term difficulties. This could also open up the possibility of abuse from external parties.

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