Crowdfunding is both a buzzword and a disruptive financing tool.
Which is why people are talking about it and making money off it.
Last year, more than US$30 billion was raised via crowdfunding from just US$2.7 billion in 2012.
That’s double the amount every year in the past three years.
The World Bank estimates the figure will top US$90 billion by 2020.
There are four types of crowdfunding — equity crowdfunding, product crowdfunding, debt crowdfunding (similar to peer-to-peer lending) and non-profit crowdfunding.
Many startups are turning to crowdfunding to raise money instead of tapping angel investors.
As a result, funds raised through this platform are approaching those from venture capital (VC).
Does that mean crowdfunding is the new VC?
Maybe not but it’s much easier for startups to deal with crowdfunding vehicles than go through the complex process of securing VC financing which includes a lengthy due diligence exercise.
In addition, startup entrepreneurs might not have access to VCs and VCs may not want to do small deals.
But VCs have their own advantages.
For instance, they allow more privacy and may offer higher valuation.
Also, VCs offer an alternative for those that are not able to participate in crowdfunding for regulatory reasons.
In the United States, for example, crowdfunding investors are required to have accreditation.
China and Britain have their own requirements.
Crowdfunding for a certain product usually does not involve equity shares, so investors don’t benefit from the growth of the company.
And crowdfunding amounts are typically smaller than from equity fundraisings.
Oculus, a manufacturer of virtual reality equipment, successfully completed a crowdfunding round for a product.
Investors regretted the fact that they had a stake in the product but not in the company after Facebook announced a US$2 billion takeover offer.
On the other hand, institutional investors stand to make a lot of money from their stake in the company.
This article appeared in the Hong Kong Economic Journal on Jan. 21.
Translation by Myssie You
[Chinese version 中文版]
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