Crowdfunding has recently caught the imagination of many mainstream and Internet businesses. In the last few months, many crowdfunding sites have gained much attention. Some of the more prominent ones include Kickstarter, Indiegogo and Razoo. Each of these crowdfunding platforms has different focus and appeal to different target users. Hence, this article is to help the uninitiated better understand what the crowdfunding fuss is about.
To start off, let us broadly categorize the different types of crowdfunding. In general, there are 4 main types – Reward, Charity, Equity and Debt. The most common type of crowdfunding is the reward-based approach, where the initiator (i.e. business owner or entrepreneur) gives rewards, in the form of product or service, to the funders. That is the business model that Kickstarter uses.
Another type of crowdfunding which is gaining popularity is the charity-based crowdfunding where funders contribute to the campaign in the form of donations. The key difference in this approach is that funders do not expect any rewards for their financial support. The donations are used to support social cause, such as disaster relief efforts, and causes.com is an example of such a platform.
A fairly recent development is equity crowdfunding. The popularity of such model grew since the US government passed the Jumpstart Our Business Startups (JOBS) Act in April 2012. The purpose of this act aims at developing an alternate source of funding for small businesses, through the selling of their company’s equity stakes to a large number of people, without having to be listed on the stock exchange. Equity-based crowdfunding has proven its success in several countries including England and France, and an example of equity-based crowdfunding site is EarlyShares.com
The last type of crowdfunding is – debt crowdfunding. This form of financing is slowly gaining acceptance among small business and companies. Through debt crowdfunding, businesses are able to raise funds in the form of loans while retaining ownership of the company. In debt crowdfunding, the initiator is legally obliged to pay the investor or funder an interest on the loan amount within a period of time. An example of debt crowdfunding platforms is FundingCircle.com.
Looking at what crowdfunding can do, the real estate business seems like a suitable candidate. At present, the pooling of resources to co-invest in a real estate project is not uncommon. These coinvestments can rely on debt or equity arrangements. Hence, from this perspective, real estate coinvesting and real estate crowdfunding is very similar. However the main difference is that real estate crowdfunding relies on the Internet as the primary distribution channel, while coinvesting typically relies on an individual’s personal network.
In terms of benefits, real estate crowdfunding can help developers secure funds in developing markets, where construction loans are not available. On the other hand, crowdfunders can also access deals and opportunities previously limited to banks and wealthy individuals. Hence, the democratising of the real estate financing through crowdfunding is definitely something that could potentially revolutionalise the real estate industry.
In conclusion, the scalability of real estate crowdfunding is what makes it an attractive business proposition. At present, we are still in early days of the crowdfunding movement. However, with greater clarity in the regulations, there could eventually be a day when crowdfunding becomes a viable funding avenue for small businesses and boutique developers. So do watch this space…