Financial Management 3
Name: Shevon LouwStudent Number: 215286960
Course: ND: Management
Due Date: 30 July 2018
What is crowdfunding 4
Brief history 4
How crowdfunding works 5
Contributing factors and how it plays a role 6
Effects of crowdfunding on economies 10
South African economy 10
International economy 12
Annexure A 16
Annexure B 17
What is crowdfunding?
Crowdfunding is a collective of people or businesses/companies pooling resources together to fund a starting-up company or business, furthermore in the educational sense, it’s an organization/company funding a student’s education through the means of a bursary.
Brief history of crowdfunding
Crowdfunding began in the 1700’s, when it was based on pooling resources together to donate to the poet Alexander Pope who needed funds to translate Greek poetry into English, furthermore the famous Mozart made use of crowdfunding as well, when he needed funds for a concert of his.
In 1884, 160 000 people via the internet donated/contributed towards the building of the stature in New York.
In 1997, crowdfunding was used to raise funds for the British rock band Marillion to help them go on their US tour and this was using the internet or social media was used as a platform for crowdfunding, furthermore in that year crowdfunding was used by a musician and programmer from Boston, who created a platform for other upcoming musicians called “ArtistShare”, to get funds needed to produce music.
In 2003, musicians had a platform where fans could donate funds for them to produce music.
In 2008, Indiegogo was founded by Slava Rubin, Danae Ringelmann, Eric Schell based in the U.S, became the first platform for startups to turn to, when in need of equity funding.(Sparkup, 2017)
In 2013, Thundafund was established in South Africa, which opened doors for South African startups to establish local businesses. (Brand South Africa, 2017)
Crowdfunding has evolved ever since when more sources were implemented, and made available for various startups, venturing in different means of business or achieving a specific goal.
How crowdfunding works
Crowdfunding is an alternative mechanism to attain capital, which moves beyond the point of approaching a bank, startup funds or beyond approaching a finance institution for aid/funds.
For startups to attain funds, they are ought to visit the platforms made available to them by visiting the various sites provided, and uploading their idea for a new business venture on those sites or the suitable social media platforms, moreover so that those who are willing to contribute can pool resources together or for those vest an interest in the venture can become a potential investor.
Contributing factors and how it plays a role
There are many financial institutes where one can attain capital or startup funds from, however with crowdfunding; life has been made easier where it is not needed to approach any bank or financial institute, to accomplish one’s goals, due to the fact that there are various sources of crowdfunding, which has been made available for people sources such as:
Rewards-based crowdfunding is simply when a company or individuals contributing towards a new business, in return the business offers an incentive for the contribution.
Equity-based crowdfunding is the most preferable source of crowdfunding.This is when people or a “crowd” invest in a business or idea, and receive a return on investment, as well dividends on the profits, however equity-based crowdfunding (EBC), has its own risks and benefits namely;
Potential for huge returns.
Greater degree of sound satisfaction.
Opportunity to invest like accredited investor.
New regulations for investor protection.
Greater business and job creation.
Greater risk of failure.
Returns may take years to accumulate.
Security of the crowdfunding platform.
Lower-quality investment may be the norm.(Picardo, 2015)
Donation-based crowdfunding (DBC); is various organizations/ individuals donating towards a good cause or to donate necessary funds in the events of a disaster or towards a charity of any kind.
Donation-based crowdfunding only happens when there is an emergency, or when an individual is looking to start their charity, moreover it could be an established charity looking for funds for example the angel trust.
Load-based crowdfunding refers to when a person/company/institution lends money in a form of a loan to startups /individuals at a fixed interest rate, like a normal loan from a bank example: African Bank, Standard Bank etc.
A loan can be done also by visiting the various crowdfunding platforms and acquire a loan, however it’s not as simple as the other sources of crowdfunding , due to the constraints, whereby the person/organization would need more convincing information about the business idea, and reasons why they need to loan them money. A loan also has implications in terms of, should the startup not have a successful longevity, and then they won’t be able to repay the loan
Investment-based crowdfunding is source whereby, a person using the platform invests into a viable idea, and receives a stake to become a stakeholder; therefore return on investment is issued as well.
Education-based crowdfunding is a “crowd” that funds a person or a collective in terms of a bursary, but only to those who meet the standard requirements.
Crowdfunding is a good method in which one can obtain funds and it has evolved for many years with numerous of sources at ones disposal, therefore not only is it much more convenient, moreover it is much quicker and accessible, but still requires presentation to attract potential investors/contributors, however crowdfunding has its own downfalls in which it should be considered
Income is one of the main reasons why crowdfunding ensures that businesses are successful; moreover income is what attracts more potential investors to invest into the business.
Sound Customer Satisfaction-
Crowdfunding ensures sound satisfaction by the means of giving investors and donators the opportunity to voice their opinions, by providing feedback by filing in a questionnaire/survey and comment for suggestions if the site should be improved or if they(investors) are dissatisfied with the business they invested in, in contrast to that those who got funded through crowdfunding do a testimonial video or a written testimonial and post it on the platform so that it helps the platforms gain recognition to attract more startups as well as investors.
Legitimacy of the platform-
Crowdfunding platforms have a system where if the person seeking funding’s idea is viable , then automatically their idea become accredited, therefore withthis investors receive a notification to inform them about a new idea, which in turn makes it easy for startups to receive funding
Different sources of crowdfunding and various platforms available –
With the evolution of crowdfunding, there are now more sources of crowdfunding, and platforms, which organizations have made available for the public, which is accessible for many people.
It can affect future financing-
Crowdfunding is a good way in which one can obtain funds, however startups need to obtain more fund, it will be difficult due to them not having the necessary financial records to indicate that they have a credit status, which any lender needs to check before they grant a loan.
May not reach goal-
In order to achieve one’s goal funds is needed, moreover with crowdfunding it is possible to do so, however with crowdfunding it is not guaranteed, furthermore for startups to reach their goal it requires a lot of funds, and there is a possibility that the funds needed won’t be fully obtained, in order to ensure longevity, therefore it coincides with the above statement that it may affect future financing, whereby should the business fall short of funds, due to the lack of funds obtained through crowdfunding, they won’t or it will be rather difficult to seek for further funding elsewhere outside of crowdfunding.
The platforms may be subject to hacking/hackers-
Crowdfunding is done online via many platforms (websites, social media etc), therefore it is prone to be a subject of hacking, in the sense that hackers would be able to gain illegal access to personal information such as; their email address, their physical address, credit information and many other personal information, moreover it will dissuade many investors to become part of the “crowd”, furthermore hackers can steal the many which has been contributed/donated.
Effects of crowdfunding on the local and international economies
South African economy
Crowdfunding began as early as 2007 in Africa, when it helped individuals, and funding their projects through a renowned platform called Indiegogo, moreover crowdfunding evolved since then when more platforms were created (See Annexure A for the full list), hereto South Africa became the leading country , when the first platform ThundaFund was created in 2013, however contrasting to this crowdfunding became the leading method throughout Africa, with the DRC( Democratic Republic of Congo) in the forefront of having the most crowdfunding sources as well general websites.( See Annexure B).(Makinda.D 2017)
Be as it may crowdfunding lends a hand in funding people with a desired goal, which has a positive effect/impact on the community such as;
Providing more jobs for local entrepreneurs
Crowdfunding made it possible for local entrepreneurs to open their own business, moreover it helps to pave a way for many entrepreneurs to turn to crowdfunding platforms for funds, and contrasting to this crowdfunding platforms gain more recognition if someone reaches his/her fund goal.
More businesses will be opened
Crowdfunding gives local entrepreneurs the opportunity to open their own business which the economy benefits from, by contributing to the tax, which the government has access to, therefore it can boost the economy’s status, and provide more funds for other departments where needed.
More services will be provided
Crowdfunding helps existing businesses to improve their service, which can help economy to grow beyond where it is now.
Investors won’t be able to have normal shares
Investors invest into a project and receive shares, with crowdfunding the same technique applies, however these investors receive shares, but they won’t be able to sell those shares, therefore it will be difficult for investors who are normally members of the community, to gift their shares or sell it for emergency purposes.
May not reach fund goal
The crowdfunding platforms cannot guarantee that one’s fund goal can be reached, therefore there will still be unemployed people, moreover they won’t be able add to the economy.
Crowdfunding internationally can help economies around the world, whereby people don’t have to turn to the bank or financial institution for funding, therefore if one is unable to pay their loan back then the banks will suffer a loss, which has a negative impact on the economy, that’s where inflation begins, furthermore crowdfunding ensures that no person is in debt, due to the money being donated.
The Platforms are open to people internationally
People from various countries can have access to the platforms can have access to the platforms all over the world, which means more investors and the fund goal can be reached in a short span of time, moreover it helps one to open a business and contribute to the economy.
Positive relationship amongst investors worldwide
Investors a build a positive relationship through crowdfunding, whereby they can get help from the platforms globally and do foreign exchange.
The negative impact/effect crowdfunding has on international economies is that, should people seek funding from various parts of the world the currency would have a hand in how little one would receive from international crowdfunding platforms for example, if someone from South Africa seek funding on a crowdfunding platform or social media from the USA then the currency indifference would count against the person, due to the South African rand being weak against the dollar.
Not all crowdfunding platforms include tax on fund, unless it’s on the equity-based crowdfunding, therefore it will leave a gap in the international economy, due taxes not being paid can cause inflation as well.5. Conclusion
Crowdfunding is accessible and convenient, moreover since the evolution of crowdfunding with more sources and platforms at one’s disposal, people are able accomplish desired goal, as well as entrepreneurs can contribute to the economy and help the economy grow as well uplift communities, however crowdfunding at its platforms have setbacks which can dissuade an investor from investors, as well people with viable ideas, furthermore crowdfunding platforms should use their setbacks as an opportunity to better themselves and providing a better service.
Crowdfunding platforms should find software or servers where it is not subject to hacking, and do monthly checks on the servers to create new firewalls, to protect their investors and the funds from being stolen.
Crowdfunding should use other methods to help people, not only using online websites or social media due to the fact that not many people have access to the internet.
The platforms should notify the people to indicate who the investor is, the amount being funded, as well an expiration date on when the funds is due, so that every viable receives funding, so that funding goals are not left incomplete due to the lack of funds.
Crowdfunding platforms should ensure that investors receive normal shares, so that investors are not bound to that project should they choose to sell their shares.
The platforms should implement a method where the investor communicates with the person, so that should the investor have more questions/queries regarding the project, then they have access to that person.
The crowdfunding platforms need to ensure that each person who has viable idea is able to reach his/her fund goal.