Power of the crowd

Crowdfunding is rapidly becoming one of the most viable and popular financing options for startups and creative projects across the globe. A concept first launched over 10 years ago in the US, it has finally started to make waves in Spain.

Until recently, funding a business, project or venture involved asking a few people for large sums of money and dealing with dispassionate banks and venture capitalists, suffocating loans and interest rates.

Crowdfunding switches this idea around, allowing anyone with a feasible idea and motivation to raise the capital they need via small amounts of money from a large number of people, through crowdfunding websites, or online ‘platforms’. Those seeking funds set up a profile of their project on a crowdfunding site, chosen according to the kind of project it is and the type of relationship the entrepreneurs want to have with their investors. They then use social media, alongside traditional networks of friends, family and work acquaintances to raise awareness, create a buzz and eventually reach their monetary goals.

If you’ve been sceptical of the growing crowdfunding fever, consider this. In 2012, crowdfunding platforms raised some €2.2 billion and successfully funded more than a million campaigns, according to a Massolution industry report. Estimates from the crowdfunding platform, Fundable, say that by the end of 2014, crowdfunding created approximately 270,000 jobs and injected more than €52 billion into the global economy. By 2025, the global crowdfunding market could reach between €72 billion and €76 billion—roughly 1.8 times the size of the global venture capital industry today—according to a 2013 study commissioned by the World Bank. In addition, since Kickstarter’s launch in 2009, 7.5 million people have pledged over €1 billion via the platform, successfully funding 74,880 creative projects. Nearer to home, Spanish crowdfunding platform, Arboribus, founded in early 2012, has already received over €1.1 million in loans for the companies who have taken their campaigns live on their website. And Mataró-based Verkami has had an unprecedented 70 percent of its projects close successfully. Besides examining the statistics, anyone who looks into crowdfunding can see the energy and excitement behind this new approach to financing. The high-street banks have got competition; there is a seemingly magical funding phenomenon taking place.

Countries like Spain, where access to capital has been almost frozen since the financial crisis, are natural markets for crowdfunding. However, the Spanish government has drafted a regulatory proposal for crowdfunding, including so many restrictions for projects, potential funders and platform operators, that it seems to want to kill the buzz. The first thing that is striking about the proposal is the economic restrictions imposed on investors. As far as it goes, they can only invest up to €3,000 per project within the same platform. It also stipulates an investment ceiling of €6,000 per platform in a 12-month period. A hindrance for foreign investors is that they are required to have a NIE in order to invest in a Spanish company. These limitations on the type and number of investments that a Spanish company can receive are forcing companies who want a global presence to turn to international, rather than local, platforms for their campaigns.

“Currently, the entrepreneurial world is much more developed in the UK and United States than in Spain. The idea of making an investment in a startup comes more naturally overseas,” said Mac Parish, Business Development Manager for CrowdCube España. “We’re here in Spain because we’ve seen the quality of projects coming out of hubs like Barcelona, and we want to provide a platform through which anyone can participate in this world of innovation and entrepreneurship.” Right now, a big challenge facing Spanish-based crowdfunding platforms is educating the prospective Spanish investor about the potential benefits of investing in startups. Even though investing in a startup carries a risk, Spain shouldn’t be missing out. They should be taking advantage of the access they have to creative opportunities.

Through the wide variety of crowdfunding platforms, anyone can participate in the world of investments. There are four different models in the crowdfunding landscape to assess, however, before taking the plunge: rewards, equity, donation and lending.

REWARDS MODEL

Investors receive a tangible item or service—usually a product of the company—in return for their funds. Kickstarter, Indiegogo, Verkami, RocketHub and PledgeMusic are all examples of reward-based crowdfunding websites.

EQUITY MODEL

Shares of a company are acquired and investors become part owners of the project. The major benefit of this model for a startup is that it is both a financing and marketing opportunity. After the campaign closes, investors are converted into brand ambassadors, talking up the company at dinner parties, sharing its blog posts, etc. Some equity crowdfunding platforms include CrowdCube, SociosInversores, The Crowd Angel, Upstart and Fundable.

DONATION MODEL

With this model of giving for nothing in return, contributions generally go towards a not-for-profit project or initiative, or medical expenses, personal causes and hardships. Many artists, musicians, writers and filmmakers—who understand that creative industries today require many people to take their careers into their own hands—also use this method of crowdfunding, relying on their fans, friends and acquaintances to help them raise the money they need to record a new album, print a new photography portfolio, go on tour, shoot their next documentary or pay for travel expenses. Peerbackers, GoFundMe and YouCaring are examples of donation-based crowdfunding websites.

LENDING MODEL

Also known as debt crowdfunding, this model pays investors back with interest. The investor is essentially providing a loan to the company. Websites that offer this crowdfunding platform are Kiva, Lending Club, Arboribus and Prosper.

All areas of crowdfunding give startups and creative projects an alternative to the traditional high-street bank lending process. And investors—from university students to small business angels—can relish in the satisfaction of helping a great idea become a viable business. Through international platforms, anyone and everyone can bear witness to the ups and downs, the delays and the struggles that come with starting a business or financing a project. And the crowd can experience, first hand, the thrill of seeing a dream they believed in turn into a real-life success story.

Read our interview with Bamboo Bikes Barcelona here, a crowdfunding success story.

6 THINGS EVERY INVESTOR SHOULD CONSIDER

1. WITH RISK COMES REWARD. Investing in early stage businesses has the potential for great returns—according to Barcinno.com, the average British business angel gets an overall return of 2.2 times the capital invested. This kind of investing does, however, involve a high risk. Research investment opportunities thoroughly, utilise forums to ask questions of the entrepreneurs and other investors and only invest what you can afford to lose.
2. CHOOSE THE RIGHT PLATFORM FOR YOU. If you’re an investment novice and want to start small, concentrate on crowdfunding sites that have minimum investments of less than 100 euros and are open to everyone. Some sites also do your due diligence for you. They vet each company, filter out projects and present the crowd with startups that have realistic business plans, tangible products, bylaws, etc. These sites are good for investors unable to spend a lot of time doing their own research.
3. GENEROUS TAX BREAKS AND INVESTMENT INCENTIVES. When investing in companies that are less than three years old, investors in Spain are entitled to an income tax write-off of 20 percent of their investment. In addition, Catalunya investors receive a supplementary 30 percent break, which means if you live in Cadaqués and invest in a new Barcelona startup, you can write-off 50 percent of your investment on your income tax return at the end of the year. As an additional incentive, if the company fails, you can recover your investment by writing off your capital gains tax for up to four years.
4. INVESTOR FEES. Beware of platforms that take a slice of your profits despite not taking any of the risk.
5. SHAREHOLDER RIGHTS AND DILUTION. Before investing, it is essential that you understand your rights as a shareholder and what will happen to those shares (and their value) as the company grows. Some platforms offer companies the option to emit voting and/or non-voting shares during their campaign. It is important to determine what kind of role you want to play in the company before investing. Dilution occurs when a company issues more shares. Every existing shareholder who does not buy any of the new shares being issued will face a reduction, or dilution, of their proportionate shareholding of the company.
6. EXITS. Given the higher risk of equity investments, it is a good idea to diversify your portfolio. If your invested companies are successful, there are different ways you could earn a return on your investment. Firstly through dividends, which are cash payments to investors taken from a company’s retained earnings. Secondly, when a company is sold to another company, shareholders are entitled to their share of this liquidity event. And finally, a company can choose to buy back investors’ shares for a multiple of what investors paid.

10 WEIRD AND WONDERFUL CROWDFUNDING CAMPAIGNS

1. Colour-changing workout clothes. Shirts by Radiate change colour based on the wearer's thermal output during training. The colour changes in different parts of the shirts corresponding to the muscle groups that are reaching optimal levels of exertion. Amount raised: $580,000.
2. Lionel Richie’s head. The founders of Bestival, a festival on the Isle of Wight, funded this huge inflatable sculpture of Lionel Richie’s head. A phone in the middle rings and visitors hear, ‘Hello…Is it me you’re looking for’. Apparently Richie’s lawyers have been in touch. Amount raised: £4,900.
3. Detroit’s statue of Robocop. A random tweet led Detroit to have its own iconic statue to rival Philadelphia’s Rocky. It stands proudly outside Wayne State University campus. Amount raised: $67,436.
4. 3Doodler 3D-printing pen. Draw in the air with this Wobble Works’ 3D pen that uses the same technology as a 3D printer to create objects. Amount raised: $2.34 million.
5. Glowing Plants. These glowing plants use synthetic biology tools and a design print transform cycle. The seeds of the plants then grow into natural nightlights. The project has generated widespread media attention and a discussion about appropriate uses of biotechnology. Amount raised: $48,400.
6. Tardis in orbit. In around 130 days’ time, a Tardis will be sent into orbit. For the 50th anniversary of Doctor Who, a father and daughter team from Florida raised double their initial target to launch a two-foot Tardis into low-Earth orbit. Amount raised: $88,880.
7. Full-size origami kayak. Combining the ancient art of origami and high-tech materials, the Oru Kayak is a foldaway kayak that you can fit in a suitcase. Amount raised: $444,000.
8. Bluetooth-powered location stickers. This is for all those forgetful people who can never find their keys. All you need is a smartphone and a Bluetooth connection. Attach a Stick-N-Find Bluetooth sticker to any object, and when you need to find it the sticker buzzes and flashes. Amount raised: $932,000
9. The insect shotgun. Bug-A-Salt turns insect eradication into a sport. Just hunt your prey down, aim and fire. A spray of table salt decimates the insect on contact. Amount raised: $578,000.
10. Grilled Cheesus. This sandwich-maker ingeniously toasts the face of Jesus onto your cheese toasty. Amount raised: $25,600.