As banks refuse to dish out the cash to small and medium enterprises following the financial crisis, a new form of funding has taken the spotlight.
Crowdfunding – with famous international platforms including Kickstarter and Seedrs – has taken centre stage and is helping to bring on a significant transformation in the way businesses think about raising money. Now it has become so popular that it is actually offering businesses a way to avoid the usual funding methods like bank loans and grant applications.
There are actually three different types of crowdfunding. In its simplest form, investors just give their cash and they receive goods and services in return. Another option is debt crowdfunding – this is when investors lend money with that the idea that it will be returned to them, plus interest. Finally, the third form is known as equity crowdfunding – this sees investors pick up shares in the belief, and hope, that their value will grow over time.
The concept is taking off globally. During 2014, it expanded by 167 per cent to reach $16.2billion – that’s up from $6.1billion in 2013. There are no official statistics available for last year at this time: but it is expected that the industry may have doubled again.
However, here in Canada the idea is struggling to get off the ground. According to Craig Asano, the founder of the National Crowdfunding Association of Canada, there are regulatory constraints in Canada that has played its role in slow adoption rates. There are also risks involved – particularly for equity crowdfunding - in that the start-up may never be successful enough to allow them to earn their money back. One in five firms in the UK that raised money via equity crowdfunding went bust between 2011 and 2013.
Yet for some there has been massive success – and for investors with a significant risk appetite, the returns can be more than satisfying.