Crowdfunding represents an emerging financing alternative for startups, micro-enterprises and small and medium-sized enterprises (SMEs). It has enormous potential as a source of funding.
• The internet has seen crowdfunding change from micro-finance and non-profit fundraising campaigns into a business financing possibility. A small amount of funds are collected individually from the public (the crowd). Proceeds are then used to fund a project and/or get a business off-the-ground.
• Several crowdfunding models currently exist including donation, reward, lending and equity; hybrid models across these areas are also present. Underpinning each of these model varieties is the exchange of a financial or non-financial contribution for some sort of strategic value proposition.
• Crowdfunding and traditional financing channels should not be thought of necessarily as substitutes, as in many cases they are complements. Each financial model serves different clientele and businesses and are used for varying purposes. Collectively, adequate access to capital can unlock the growth potential of micro-enterprises and small businesses.
• The global crowdfunding market is estimated to be worth US$3-5 billion, making it a small source of funding today. North America and Europe account for roughly 95% of the market. While data are sparse and mostly proprietary, the market appears to have grown rapidly in recent years.
• As crowdfunding increasingly enters entrepreneurial awareness, the advantages and challenges of the funding mechanism will need to be addressed. Equity crowdfunding has the greatest challenge, as the transaction is ongoing versus one-time. To address the inherent concerns, regulators in the U.S. and Canada are currently developing a framework of best practices for equity crowdfunding.
• While effective and enforceable regulation is required, there is a risk of over-regulation especially given the innovative nature associated with crowdfunding. Nevertheless, fraud, information asymmetry and crowd due diligence are structural barriers and risks that must be addressed if crowdfunding is to reach its upmost potential.