Does every crowd have a silver lining?
NEARLY TWO years ago, a word was added to the Oxford English Dictionary: crowdfunding. Its use had grown to such an extent that it merited inclusion in the prestigious publication and, like many other terms we use today, such as Googling and tweeting, it is a product of the internet. But what is crowdfunding and how can we use it?
At its best, crowdfunding is the ultimate example of people power. Where once funding for business start-ups would be the preserve of big financial institutions or extremely wealthy individuals, now investing in a burgeoning enterprise — sometimes with the possibility of a healthy return — is within everyone’s reach.
The concept of crowdfunding began 20 years ago, thanks to some clever thinking on how to put increasingly accessible new technology to good use. The UK rock band Marillion had a large fan base but not the necessary financial backing for a tour of the United States. Using the internet, the band harnessed its grass-roots support and the tour, followed by an album, was funded through fans’ contributions. Today, fan-based internet campaigns to finance new musical projects, tours or albums, have become an increasingly popular way to bypass the more traditional methods of getting established in the music business.
David Landau is director of Right Recordings, an independent record label based in London and Nashville. He says crowdfunding has had a striking impact on the music industry. “It has given opportunities to artists who would not have had the chance to record their music for financial reasons, as labels these days may not necessarily get involved in the recording costs. Crowdfunding gives talent the possibility to be recognised where previously it may have passed unnoticed.”
It is not just the music business that has benefited from crowdfunding. New creative projects, local initiatives and start-up businesses can all use it as a means of raising the necessary cash to get going.
There are several crowdfunding models and, because it is a relatively new method of financing, it is still developing. As with many other channels of investment, there are risks involved. Currently there is only partial industry regulation in this area. There is a UK Crowdfunding Association, which has its own code of conduct for members (the online “platforms” which coordinate and administer the fundraising). The Financial Conduct Authority (FCA) regulates some types of crowdfunding but not all.
For instance, the FCA does not govern donation-based crowdfunding, where people give money to enterprises or organisations they wish to support. Neither does it regulate pre-payment or rewards-based crowdfunding, where people give money in return for a service or product, such as tickets or computer games.
However, there are regulations in place for loan-based crowdfunding, where money is lent in return for interest payments and a repayment of capital over time.
Similarly, investment-based crowdfunding, where people put their money into a business by buying investments such as shares, is also under regulation by the FCA. Some say you should invest in a crowdfunding scheme only if you are prepared and can afford to lose and investors should always be especially wary about entering into financial transactions online because of the risk of fraud.
Whether you want to invest in a community project with no financial return, such as building a local park, help a new band release its first album or support a Dragon’s Den-type start-up, crowdfunding could help you make a significant contribution.
Conversely, if you believe you are the next Lord Sugar and just need that initial financial boost, crowdfunding is a possible solution. Make sure your pitch is inspiring and you have done as much research as possible, as there are thousands of other new businesses out there also looking for start-up capital. Be ready to answer questions and be passionate about your idea, so you can engage as many people as possible online. It could be the first step in a brilliant business career.