Equity and debt crowdfunding present a necessary disruption to the economic model that has defined our investment patterns for too long. Frequently termed the more ‘democratic’ and ‘transparent’ investment model, the potential of crowdfunding platforms for businesses is enormous.
Nonetheless, eager companies looking to raise capital to expand their enterprise via crowdfunding should be aware of the key challenges that face any aspiring crowdfunding campaign. Every economic model has its pitfalls - here are five that businesses should consider when launching a crowdfunding campaign.
1. Crowdfunding platforms are not created equal
Any crowdfunding platform will posit its services as the gateway between you and a path of fiscal certainty. However, every platform is different. Each can offer the appealing tenets of equity crowdfunding – a cost and time-efficient fundraising process, a user-friendly website, contact with eager investors – but be sure to ally with a platform that fits your vision.
Looking to a platform’s previous clients provides indication of their investor network and breadth of expertise. Consider platforms that are familiar with legislation of foreign territories, if you are seeking to expand with a population of foreign investors.
Approach the raise from the perspective of the investor – which platform offers the most accessible, user-friendly tools? With the constant proliferation of platforms, companies and investors alike must be scrupulous in their choices.
2. Platform fraud is a concern
Alternative finance is as open to manipulation as any industry, and a crowdfunding platform in Sweden has already been suspended owing to malpractice. Earlier in the year, the University of Cambridge and Nesta published an industry report identifying platform fraud and malpractice as the greatest threat to the future of the industry. This underlines the importance of our first point, favouring platforms with a flawless track record.
Nordic countries have established measures to assure investors at this relatively early stage of the model, by requiring licensing of equity crowdfunding platforms. For example, Invesdor has attained a MiFID-level (Markets in Financial Instruments Directive) investment firm licence, a major competitive advantage and symbol of trust. Accordingly, under EU law it has the financial equivalent of a passport to operate across the EEA.
3. Your idea needs protection
Copyright and privacy concerns should be at the forefront of any company looking to fundraise using the crowd. The public nature that empowers crowdfunding’s model also poses challenges. Ensure the platform you’re using prioritises your privacy every step of the way.
Platforms that have been regulated, such as Invesdor, already have obligations in place that are comparable to bank secrecy. Invesdor operates under a Europe-wide license, ensuring legal protection for clients across all 31 EEA countries. These, in conjunction with Invesdor’s platform-client contractual obligations, guarantee a high standard of protection for clients.
4. Your funding target may not be met
Managing your expectations is as essential a part of the process as any, and the magnitude of your raise must be estimated accordingly.
Typically, crowdfunding platforms will return investors’ funds if a crowdfunding campaign does not hit its target. This ensures investors can contribute under the certainty that a company can execute its proposed strategy.
This poses a challenge for companies seeking crowdfunding. Companies need to assess investor appetite and their capital needs, and decide on an optimum funding target that addresses both. Failing to do so can see a company back at square one.
5. Crowdfunding may not be the most economic option
Consider whether it is the most viable financing option for you. First and foremost, companies should consider the fee payable to the crowdfunding platform – for a raise of €1 million, fees range from €50,000 to €100,000 depending on the platform. Nonetheless, certain regulated platforms, such as Invesdor, will conduct due diligence and furnish some assistance in legal matters, as part of the standard fee, which can diminish the cost further.
If you compare the costs of a crowdfunding platforms with those of traditional investment banks and underwriters, the savings of a crowdfunding campaign can be dramatic. However, if you’re able to seek capital privately, there may be cost advantages that outweigh the benefits of crowdfunding.
Crowdfunding is a powerful and revolutionary development in the financial industry. It provides an alternative to traditional finance by harnessing the internet and the ‘crowd’.
Crowdfunding’s advantages are plentiful. It provides a public platform to validate a product or idea, offers incidental marketing and exposure, and brings time and cost-efficiencies that traditional finance channels cannot match. Investors need to be wary of the challenges that are involved with crowdfunding and weigh them up against the numerous benefits available.
Richard Andrée Wiltens is a commentator within the fintech sector, who has written for an array of international investment platforms. His career has spanned from investment banking to financial technology firms, backed by an education in economics and finance.