The magic of crowdfunding
ATTY. MIKE GERALD C. DAVID, CPA
Mom would always say that “ideas are nothing until you put them into action”. With today’s economy, however, the “taking action” part usually has the most problems. This leaves entrepreneurs solving the biggest of these hurdles—financing—to turn these ideas into reality.
Here in the Philippines and in many countries around the world, not only is the family the basic unit of society, but it also serves as the primordial foundation for economic activity. In fact, it is a usual sight to find someone starting up a business by borrowing money or seeking financial support from family members (usually from the parents). While there is nothing wrong with this practice, the amount that can be raised or the exposure potential for the idea is not fully utilized—not to mention the consequential family drama.
The past decade, however, introduced a new way of raising funds for startups and brooding entrepreneurs in the form of crowdfunding. Crowdfunding is essentially a way or activity where entrepreneurs can pitch a business idea to a wider set of audience across the world through social media or an internet platform. These platforms bring together entrepreneurs and investors to exchange these ideas and attract investments, which are made in real-time across various countries around the world. This system indeed expands the traditional funding circle of banks, relatives, and venture capitalists. This way, startups can focus more on the development of their product/service rather than going around town pitching their ideas in hopes for a pecuniary nod on their proposals.
Crowdfunding, through its biggest platform, Kickstarter, proved to be a very effective mode of hosting linkages between entrepreneurs and investors. Since its inception in 2009, Kickstarter has successfully funded 130,000 projects having around $3.76 Billion worth of pledges on all its projects. The huge acceptance and positive reception of these crowdfunding platforms continue to grow. In fact, it is estimated that it will be a $300 Billion industry by the year 2025.
Inventions funded by Kickstarter
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In this system, investors are offered several ways of infusing funds and choosing their type of returns. Companies who run crowdfunding platforms then earn through receiving a percentage of the funding or through fixed service fees. The most common type is the “reward-based” crowdfunding where investors get to participate in developing the business and receive a gift or the product developed. Growing popularity in this area are small video game developers who reward their investors copies of the game that they created or when developers of VR modules hand out the first batch of VR devices to their benefactors.
Another type is “Peer-to-Peer Lending” that enable proponents to gain funding outside the traditional banking system through the risk-taking investors who are willing to shed a buck or two towards the growth of their loan portfolios. Akin to this type is also “Donation-based” crowdfunding wherein donor-benefactors would support local startups to help fund small or short-term business needs. In fact, Dr. Muhammad Yunus won the Noble Prize in 2006 for his contribution to microfinancing.
Gaining traction in recent years, “Equity-based” funding allow investors to own a share of the proponent’s venture without gaining control over the enterprise but receive shares of the profit in the form of company dividends. This form of crowdfunding is naturally regulated under security and exchange commission of various jurisdiction—usually in the form of accrediting companies/individuals who may be allowed to invest in these brooding ventures (usually those having a minimum net worth or level of income).
With all these sources at hand, risks also exist in the form of frauds, scams, and sites that victimize unsuspecting investors and startups. Adding to the mix is the possibility of intellectual property infringement. Through these platforms, inventors, developers, or entrepreneurs risk having their ideas stolen by scrupulous participants or have their hard-earned money fraudulently taken away for false promises of returns or a faulty platform, which will be impossible to crack down once it turn-turtle.
As any business venture may entail, these risks exist among the tri-partite relationship of the proponent-investor-platform. Hence, users must use caution and diligence in dealings with crowdfunding platforms as current regulations around the world, especially in the Philippines, seem to be insufficient in ensuring the protection of its participants.
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