Tech trends have always had an indelible impact on how business is shaped, and some more so than others. One of the more recent innovations that has had long-reaching effects on business has been social media. There is now the capacity to reach potentially thousands of friends, acquaintances, and generally interested parties through a combination of your choice of a platter of social networks. With a few quick keystrokes, one can send all kinds of information and updates to just about everyone they know (and perhaps forgot they knew). This kind of immediate and wide-reaching access has changed the world of marketing businesses, as word-of-mouth has been elevated to cosmic levels. Moreover, financing and lending, which has long been traditional in its processes, has found itself evolving to meet the advantages of social media. Would-be entrepreneurs can now use social media to pitch for start-up seed money in a new financing construction called crowdfunding. Crowdfunding is essentially a peer-to-peer type of financing model through a social platform, allowing people to request funding for projects or start-ups not only from their close family and friends, but extended network and general public through a variety of websites. These funding models break down into three basic categories.
Donation based crowdfunding – One way for projects to get started is through simple old-fashioned community donations, or philanthropy. Philanthropic donors don’t get a return on their investment, or even paid back, but they are usually committed to the idea of the project or business existing. Organizations like Kickstarter, IndiGoGo, and RocketHub help put together philanthropists with projects. However, while the money doesn’t necessarily need to be paid back, it is still considered taxable income.
Loan-based crowdfunding – Borrowing and lending money is an age-old transaction. Today this typically involves banks and credit checks, which determine your spending power. This sort of traditional lending relationship can cumbersome and limiting to a new venture that may be lacking the credit qualifications necessary to get a project off the ground. Crowdfunding through organizations like SoMoLend, San-Francisco based Kiva (through their Kiva Zip project), and Prosper can link investor lenders directly to projects.
Equity based crowdfunding – Finally, there is the investor model, wherein an interested party can more or less purchase a cash share of a business for their investment. This has typically been relegated to the realm of angel, or venture capital investing, however, crowdfunding is making this type of transaction more available to blossoming investors. This can be a bit more complex, and regulators are beginning to address this challenge. However, organizations like Crowdfunder and UK based Crowdcube are stepping up to the plate to be the first adapters in this arena.
With social media quickly rising as the new tech bubble, crowdfunding will continue to come to the fore as a more and more notable source of financing. Some of the advantages are clear – more marketing potential and access to previously untapped resources. Conversely, some of the disadvantages include things like limited funding (you can set a wish list, but then rely on visitors to the website choosing your venture over the others offered), and that much public exposure may open a project up to potential imitators. Nonetheless, the growth of this new platform will continue to improve opportunities for new endeavors.