Crowdfunding is the new investment buzz sweeping the US, UK and Europe, but what is crowdfunding and how do you get involved?
Crowdfunding describes a large group of investors who each contribute a small amount to a project.
The concept has gained traction with startups and small businesses as it gives them a route to raise cash as they are frozen out of borrowing from more traditional sources, like the banks.
Putting money in to a crowdfunding project is simple – either:
- Give a donation and don’t expect a lot in return
- Make a loan and charge interest
- Invest in a business as a partner or shareholder
Many crowdfunding projects test the demand for their projects by inviting investors to join them and can raise funds quite cheaply – projects with a low level of interest are unlikely to go forward.
The downside is releasing confidential information before the project is ready to roll increases the risk of copycats getting to market first and the nature of crowdfunding often means only small sums of investment are offered.
So does crowdfunding work?
Kickstarter, a leading US crowdfunding website, reckons 20% of projects go nowhere, while around 43% of more than 20,300 projects hit their funding targets.
More than $50 million has been pledged on the site – with $40 million collected at an average of $2,600 a project.
Measuring success by testing if a project raises the desired funds at the outset does not mean the investment makes money and the failure rate of crowdfunded businesses is roughly the same as any other startup – with 50% failing within the first year or so.
Most crowdfunding projects are from creatives looking for investment in games software, films, music and technology.