Online peer-based fundraising tools have the potential to disrupt traditional investing models, but entrepreneurs and investors must overcome existing cultural and government barriers.
Sourced through Scoop.it from: www.strategy-business.com
Bottom Line: Online peer-based fundraising tools have the potential to disrupt traditional investing models, but entrepreneurs and investors must overcome existing cultural and government barriers. In 2012, Eric Migicovsky had an idea. The recent engineering graduate had been trying to drum up investment to develop his concept of a “smartwatch,” a device that could connect to an iPhone or Android and provide athletes with real-time messages, music control, and distance calculations. But Migicovsky could raise only US$375,000 from angel investors — not enough to meet his R&D needs. So he decided to take a different approach, and turned to crowdfunding website Kickstarter. Within 24 hours, people had chipped in to raise the entirety of his $100,000 fundraising goal. He gathered almost $10.3 million in the next three months to fund the release of the Pebble watch in 2013. Reward-based crowdfunding is another popular approach. In this model, contributors are offered nonfinancial incentives — such as autographed merchandise, special editions of products, or early access to new offerings — in exchange for their backing. This market raked in more than $1.4 billion worldwide in 2012, or more than half of the total crowdfunding investment for that year. Kshetri credits the helpful efforts of trade associations — such as the National Crowdfunding Association in the U.S., formed in advance of the JOBS Act — with driving legislative and policy changes, especially regarding equity- and reward-based models (though these groups probably won’t have the same luck at changing deeply held cultural beliefs or financial practices). And then there’s technology. Given the global reach of crowdfunding, its growth and usefulness to entrepreneurs depends on the compatibility of payment schemes. For example, the crowdfunding portal Ideame struggled to become the dominant player across Latin America because countries within the region use a variety of currencies and employ different systems to process Internet transactions. As a result, it’s more difficult for people to make cross-border investments, and collaboration between governments is needed to make the industry grow. As crowdfunding projects become more sophisticated, Kshetri writes, their creators and promoters could improve their prospects by tailoring pitches to match the cultural expectations of potential contributors. For example, U.S.-based crowdfunding projects are typically product oriented, meaning investors expect to have a tangible asset as a result of their backing. Funders in South America, on the other hand, are more likely to support causes or products that benefit society as a whole. Regardless, demand far exceeds supply in the worldwide finance industry. For example, the World Bank reports that about 2 billion adults in don’t have bank accounts. Could crowdfunding help fill this enormous gap and stimulate new activities among entrepreneurs who lack the access, experience, or cultural support to take advantage of traditional methods? Or will it simply be an alternative for those who already have other options?