What is crowdfunding and how does it work?
Until recently, financing a business involved going the traditional way: asking a financing institution for a loan or contacting a few people for big sums of money. Crowdfunding turns this idea on its head, using the internet to help entrepreneurs reach out to thousands of potential funders that can each contribute a small amount.
This means that small business owners that are being turned down by financing Institutions now have an opportunity to appeal directly to small investors. Equally, whereas investing in small businesses was previously the domain of the very rich, this new concept means anyone can reap the benefits of investing in fledgling start-ups - whether you want to risk €5 or €25,000.
The sector is not without its challenges. While partial industry regulation has now been established, discussions are ongoing between crowdfunding pioneers and regulators in an attempt to find a balance between protecting investors - many small businesses flop early on - while allowing for the creativity and freedom needed to make ventures a success.
Companies requiring huge amounts of start-up capital may continue to be funded in more traditional ways - venture capitalists, for example, are likely to carry on plugging the funding gap.
However, in the immediate term, crowdfunding is poised to alter the entrepreneurial ecosystem significantly - just like angel investing, venture capital, and private equity before it.
According to the UK Crowdfunding Association there are officially three different forms of crowdfunding:
Debt crowdfunding: Investors receive their money back with interest. Also called peer-to-peer lending or lend-to-save, it allows for the lending of money while bypassing traditional banks. Returns are financial but investors also have the benefit of contributing to the success of an idea they believe in.
Equity crowdfunding: where people invest in an opportunity in exchange for a share in the business, project or venture. As with other types of shares, if it is successful the value goes up. If not, just like shares, the value goes down and you could lose your money.
Donation crowdfunding: is when people invest simply because they believe in the cause. Rewards, such as acknowledgements, free tickets to an event, regular news updates, free gifts etc, are usually given based on the donation amount. However returns are considered intangible. Donors have a social or personal motivation for putting their money in and expect nothing back, except perhaps the satisfaction of having supported the project.
Such a platform has recently been launched in Malta and is managed by ZAAR. They have had two successful projects: the Pet Cabin at Mater Dei Hospital and Murphy runs for Hospice. This clearly shows that the pitch for a project should make the audience want to own the cause in order to be successful.
While crowdfunding is a fairly new initiative with exciting prospects for many - and gives small businesses access to funding opportunities like never before - it can be a confusing arena for most people because it is presented in such a wide spectrum of ways. Investments or donations are usually made through online platforms, which then coordinate and administer the fundraising. Projects can range from those helping to finance community-based projects for no financial return, to sophisticated portfolio-picking, purely for monetary gain.
Crowdfunding: an arts perspective
Since the advent of ZAAR.com.mt, Malta’s first and only crowdfunding website, entrepreneurs, NGOs and artists now have the possibility to submit their projects and have them funded through small donations from the public.
Recently, ZAAR announced that Adina – Short Movie, having raised 102% of its total goal, became the first arts project to be fully-funded on the platform. This could be a reality for your project too, but there are a few things you should keep in mind to ensure that you give your project enough of a push to reach as many people as possible.
If you're thinking of launching an arts project on ZAAR, here's our advice:
Explain where the money will go: Art supplies and props – particularly if you are looking at creating sculpture or putting up a performance – can be extremely expensive. Even so, never assume that your backers know that, so it's best to explain how the budget will be divided and used up.
Think of your backers: When putting together your synopsis, think long and hard about why you think people should back your project. Is there anything like it on the scene? If yes, how is yours different? Is this a new concept? If so, try to explain in it one sentence. This will be a hard task, but incredibly worthwhile.
Try to stand out: As time goes on, ZAAR is becoming the platform of choice for many different enterprises, so it’s important to stand out and be different. Through videos, animated gifs and concrete examples of how the project will work, you will be more likely to attract backers to your cause.
Pledge some rewards: From exclusive, hand-made items to invitations to the opening night, there is a lot you can do to incentivise backers, and to give back to the people who helped support your project. When thinking of your rewards, keep your audience in mind and make them feel part of the project as a whole. So, if you’re planning a photography exhibition, why not give out postcards or prints, for example?
Promote your project: Like any other project looking to be crowdfunded, it’s important to get the word out there. And remember: while traditional PR in print and on different media may be expensive, you can use social media to get it to go as viral as possible. So don’t be afraid to ask your team members and friends to share and promote.
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