With the news last week that Etsy are launching a new crowdfunding element of their platform, we thought we’d delve into this disruptive trend and its impressive growth…
So let’s start with the basics, what's crowdfunding?
Until recently, financing a new business involved asking a few people for large sums of money. Crowdfunding - a way of raising money through lots of small investments from a large number of people has turned this on its head.
There are three different types of crowdfunding:
Donation crowdfunding - People invest quite simply because they believe in the cause.
Debt crowdfunding - Investors receive their money back with interest, and allows for the lending of money while bypassing traditional banks.
Equity crowdfunding - People invest in an opportunity in exchange for equity.
Where did it all begin?
Rumour has it that the first online crowdfunded project was born in 1997, when British rock band Marillion’s US tour had to be cancelled due to a lack of funds. Using a primitive version of the internet their American fans managed to raise $60,000 so that the tour could go ahead.
Other creative projects soon followed suit, and the first crowdfunding website appeared in 2001. In 2012, there were over 500 crowdfunding platforms online and February of that year saw the first crowdfunded project raise over £1,000,000.
Last year UK equity-based crowdfunding doubled in size to over £50 million, but what can we expect to see from crowdfunders of the future?
Existing companies crowdfunding new projects
Registries within existing marketplaces e.g. crowdfunding wedding list items
Incorporating crowdfunding technology into programming
Integrating crowdfunding into online communities, e.g. Reddit launched Redditmade, their own crowdfunding platform
The effects of crowdfunding…
One of the main effects of crowdfunding is that it democratizes finance, both for companies seeking investment and individuals looking to invest. But how does this work for everyone involved?
Startups and individuals:
Startups can gain access to investment that they might not have received from traditional funding routes, often at a lower cost
They have access to investors across the globe, meaning they’re able to find a community that supports them.
By having centralized access to investors, entrepreneurs can spend less time traveling far and wide to court potential investors, and instead focus on the core activity of making their business a success.
Investors:
Anyone who would like to invest on their own behalf, known as ‘retail investors’, can invest in crowdfunded businesses.
Crowdfunding makes investing more accessible - you can invest as little as £100 to gain equity stake in a startup.
The individual has control over their investment, and can directly support companies they believe in.
Here’s a couple of our favourite success stories…
Mini Museum
What is it? Hans Fex raised $1.2m from 5,030 backers for his "pocket-sized collection of rare specimens... a portable collection of curiosities where every item is authentic, iconic and labeled". Those purchasing the Mini Museum could be the proud owners of shards of lunar rock, dinosaur egg-shell, mummy wrap and tiny chunks of London Bridge!
And one that particularly amused the Freshminds team…
What is it? Built-in blender? Check. USB charger? Check. Speaker? Check. Bottle opener? Check. The ‘Coolest’ cooler comes with anything you could possibly need for the summer and raised an impressive $13m in its first round of funding. Their Kickstarter video is definitely worth a watch!
