Crowdfunding vs. crowdinvesting

Crowdfunding is just like the popular crowdinvesting a form of swarm financing. However, crowdfunding differs significantly from crowdinvesting. Whereas crowdfunding investors (the crowdfunders) purchase no shares in return for their investment but receive a non-monetary symbolic consideration such as a book, the crowdinvesting funders receive a stake in the startup in return for their investment. They become co-partners or co-owners of the startup. They only get a benefit from their investment in case of a successful exit through the profit from the sale of its stake in the startup. As a result, crowdfunding has more of a donations character in contrast to the crowdinvesting. [1]

Crowdfunding becomes more important

The United States are the cradle of crowdfunding. Crowdfunding initially became known in Germany through the US-based crowdfunding platforms Kickstarter and Indiegogo. The number of active crowdfunding platforms in Germany has been continuously increasing since 2011. Also for that reason crowdfunding as a relatively young source of funding for startups is increasingly meaningful in Germany. [2] The financing volume increases gradually. During the fourth quarter of 2011, only approximately TEUR 105 were invested on crowdfunding platforms, in the fourth quarter of 2012 TEUR 796, in the fourth quarter of 2013 TEUR 1,960 and in the second quarter 2014 already TEUR 2,844. [3]

How crowdfunding works

Crowdfunding is a largely standardized procedure to raise funds for a startup or a particular project via crowdfunding platforms on the internet. [4] Project founders and startups present samples of their work, concepts and business models – mostly from the artistic, social or technology-based area – to a variety of potential crowdfunders. In addition, they communicate the financial requirements that must be met to implement the plan, the expected duration of the project and the symbolic profit the crowdfunders can expect in return for their investment.

The crowdfunder’s motivation is primarily altruistic. They do not expect a monetary return for their investment. Project founders and startups try to address as many crowdfunders as possible by using a sophisticated communication strategy. Their goal is to motivate the crowdfunders to donate a manageable sum for their project or startup. Sometimes considerable amounts for the implementation of their project or startup can be collected. A project or startup gets started if the specified financial target is achieved within the specified funding period. If the funding does not succeed, the crowdfunders usually get back their initial investment. The project does not happen as planned. [5]

An attractive financing alternative for startups

Crowdfunding is an attractive financing alternative for startups. Crowdfunding platforms give founders the opportunity to get into direct contact with a lot of internet users. Especially for companies that are in the seed stage, crowdfunding may be a serious alternative for the startup financing in comparison to classic venture capital or the financial support of business angels. Crowdfunding has additional benefits to offer: as a marketing tool, it can help to make the company’s products and services become more accessible to a broad public. In addition, crowdfunding offers the opportunity to identify potential target markets and to test its own business model. Thus it is a good indication that the business model should be reconsidered before the next trial is started, when founders recognize that they are still far away from their financial target after a closed financing.

Currently there is limited capital consumption

Crowdfunding offers only a limited possibility to raise capital. [6] In Germany, a public crowdfunding is currently limited to 100,000 euros – if the founders want to avoid spending time and costs dealing with the Prospectus Act (VerkProsG). Often, however, their capital requirements for meaningful implementation of their business model is far above 100,000 euros. [7]

Tips for successful crowdfunding

In order to reach as many crowdfunders as possible, a creative marketing strategy is important. The use of social media such as Facebook, Twitter, LinkedIn and Xing is obvious and helpful. However, the use of social media alone is rarely sufficient to achieve the funding target. Potential crowdfunders need a lot of motivation before they donate their money. Deliberate considerations as a symbolic return for paid donations are a known and adequate resource to motivate crowdfunders for donations.

Higher donations can be received ​​on a regular basis if the amount of the consideration is linked to the amount of the paid donation. Moreover, it may well make sense to transfer the internet-based crowdfunding to the real world – for example by having a fundraising party. Such a party is suitable to inspire other people by presenting one’s own project to them and to collect additional funds. In addition, such a party gives you the opportunity to get into personal contact with your supporters. Thus it gives you the possibility to build a broader network of supporters and make your intentions known. The private network should also be actively increased, for example, through asking communities on social media and blogs that target the desired audience. Ask them actively to report about your own project. The crowdfunders must be kept updated about the progressing projects to date. In this context, social networks come back into focus as a useful communication channel, but also the classic e-mail is still an appropriate medium. [8]

 

References

[1] cf. https://www.companisto.com/de/crowdinvesting-vs-crowdfunding (last accessed on 14.9.2014)

[2] cf. Kulicke/Leimbach 2012, p 31

[3] cf. http://de.statista.com/statistik/daten/studie/252351/umfrage/durch-crowd-funding-eingesammeltes-kapital-in-deutschland-nach-quartalen/ (last accessed on 14.9.2014)

[4] cf. Manchanda/Muralidharan 2014, p 371

[5] cf. Kulicke/Leimbach 2012, p 31

[6] cf. Manchanda/Muralidharan 2014, p 371

[7] cf. Sauer 2012

[8] cf. Brown 2014, p 18

 

Brown, Carolyn M. (2014): The Art of Asking for Money. 5 Tips for Running a Successful Crowdfunding Campaign, April 2014, p 18.

Companisto (no year mentioned): Wie unterscheiden sich Crowdinvesting und Crowdfunding für Startups? https://www.companisto.com/de/crowdinvesting-vs-crowdfunding (last accessed on 14.9.2014)

Griffin, Zachary J. (2012): Crowdfunding. Fleeces the American Masses. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2030001 (last accessed on 21.2.2014).

Kulicke, Marianne/Leimbach, Timo (2012): Gutachten. Venture Capital und weitere Rahmenbedingungen für eine Gründungskultur. Für das Sekretariat der Enquete-Kommission „Internet und digitale Gesellschaft“ des Deutschen Bundestages. http://www.bundestag.de/internetenquete/dokumentation/Wirtschaft_Arbeit_Green_IT1/PGWAG_2012-10-22/PGWAG_2012-10-22_GutachtenFraunhoferVC.pdf (last accessed on 21.12.2013).

Manchanda, Karish/Muralidharan, Pushkala (2014): Crowdfunding. A New Paradigm in Startup Financing, in: Global Conference on Business & Finance Proceedings, Vol. 9 (1), p 369–374.

Sauer, Jens-Uwe (2012): Offener Brief. Erleichterung für Gründer bei Crowdfunding über 100.000 Euro. http://blog.seedmatch.de/2012/03/29/offener-brief-erleichterung-fur-grunder-bei-crowdfunding-uber-100-000-euro/ (last accessed on 21.2.2014).

Statista (no year mentioned): Durch Crowdfunding eingesammeltes Kapital in Deutschland in den Jahren 2011 bis 2014 nach Quartalen (in 1.000 Euro). http://de.statista.com/statistik/daten/studie/252351/umfrage/durch-crowd-funding-eingesammeltes-kapital-in-deutschland-nach-quartalen/ (last accessed on 14.9.2014)

 

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