Introduction to crowd funding models

1. Donation Based Crowdfunding

The typical example of this type of crowdfunding is the fundraising for humanitarian purposes. People donate their money for a cause, an idea or simply in order to help the organisation making the campaign. In fact, the people who donate don’t expect any type of reward from their actions, they simply hope that the amount they have invested can really help make a difference.

2. Rewards Based Crowdfunding

We can consider the Rewards Based Crowdfunding as the “upgrade” to donation crowdfunding. In fact, very early stage companies make these kind of crowdfunding campaigns in order to finance the production of their future product. By financing the project, the investor will get the product or a discount when the product will be ready for the market. In order to make people invest more money, there are different discount levels that are offered, usually increasing with the amount invested. However, the perception of this kind of crowdfunding is similar to the donation type because you don’t even know if the campaign will reach the target and the production will effectively start. One of the most famous platforms for rewards-based crowdfunding is Indiegogo, in which you can find innovative and hightech products that are going to be produced with the funds of their campaigns.

3. Debt Based Crowdfunding

Think of a bond. A state offers these types of financial instruments in exchange for liquidity. Of course there will be an interest rate that defines the earnings that the investor will get at the end of a fixed period. It works similarly for debt based Crowdfunding. In fact, these campaigns are particularly popular among entrepreneurs who don’t want to give up equity in their start-up companies immediately and/or do not have access to more traditional types of loan facilities. These are also growing in popularity as a way for real estate developer to fund a particular real estate project or projects.

4. Equity Based Crowdfunding

In an equity-based crowdfunding campaign, a person contributing money can expect to receive some ownership of the company that is raising the funds. From another perspective, the company which is running the campaign is selling off a piece of its ownership (e.g., shares, membership interest, etc.) to each of the crowd members who contributed with money. Usually the crowd is interested in participating in this kind of crowdfunding because the equity, that they are buying can address them dividend or can be sold in the future at a higher value. Equity based crowdfunding campaigns are being used more and more by entrepreneurs and start-ups seeking an alternative to traditional venture capital and angel investors when looking for a capital infusion to take their business to the next level.

5. [NEW] The Introduction of Blockchain Equity Crowdfunding

Equity crowdfunding is the most interesting type of crowdfunding for investors who are seeking for great profits. In the the blockchain based equity crowdfunding model, the equities are recorded on a blockchain in order to make use of the advantages that blockchain technology brings. It is immutable too hacks such as DDoSS attacks, which is a problem that even big companies like VISA and Playstation still struggle with. It also allows for a more liquid tradeoff which makes it more accessible. By combining the blockchain technology and the equity crowdfunding, each project will have more visibility and engagement from the investor side, because they are interested in the growing of the company.

Clearly equity crowdfunding is experiencing rapid growth, here are some recent examples:

1. Zazu, a Lusaka-based fintech company, announced that it had raised USD 1.4M in funding in its second crowdfunding campaign, it has already announced a third coming soon.

2. The UK FinTech Curve, an Over-The-Top banking platform that consolidates multiple cards and accounts into one smart card and app to simplify and unify how people spend, send see and save their money, announced it's first crowdfunding campaign (Crowdcube). Curve offered eligible customers a chance to invest in "one of Europe’s hottest fintech start-ups", enabling them to invest from as little as £10 to own part of the business and gain access to some exclusive shareholder rewards. Curve raised £6m in a fast-paced crowdfunding campaign that saw £4m raised in just 42 minutes. The first £1M took five minutes and the total number of participants ended at just over 9,500 people.

3.Arival Bank recently raised $2.3M in a pre-Series A, equity crowdfunding campaign. The Singapore-based FinTech bank for businesses and entrepreneurs soared past its fundraising target of $864,500, and now boasts a pre-money valuation of more than $14.8 million. The campaign marks the first time a digital bank has conducted an equity crowdfunding raise in the USA. Seedinvest, an SEC-licensed broker-dealer platform based in New York, spearheaded the fundraising with Crowdcube in the role of joint partner.

In 2020, many SME’s are looking for new ways to obtain financing for their startup. The world has been rocked by COVID, and large nations such as the United States have re-entered recession. As a result, financial institutions are once again, pulling the rug from under many new companies looking to make their mark.

It is because of this reluctance by traditional financial institutions, that the peer to peer market is moving forward at a speed the market has not seen in other comparable segments. In recent years, lending and investing on a peer to peer model, has spread globally as user experiences and business models are reimagined. Much of what is to come in the next few years will certainly be about consolidation, at all times enhanced user experience and crucially important, marketing innovation.

The battle for attention is waging and an ethical, yet aggressive solution is what may differentiate a brand. Let's not forget, the same banks are pouring hundreds of millions into FinTech M&A, into the very same challengers who spoke so poorly of them publicly in their initial days.

For those watching the industry closely, we know that today's founder/CEO is frustrated by venture capital, who many say do very little real venture investing, but instead focus on the lowest possible risk investments working in tandem with their partners as “followers”. Twinning this with the fact that most VC firms are simply looking for their ‘pound of flesh’ and give little to no care about the company itself. Rather, they place their focus on the profits to be made and their exit strategy.

Founders and innovators, are looking at alternatives and crowdfunding has become a proven channel for these different funding rounds. A good performing peer to peer fundraising can expect to reach numbers as high as $15M, although regulatory hurdles keep these rounds to lower amounts for smaller organisations (typically less than ~$8M).

This market is driven by great user experiences, promoting ease-of-use for the companies and investors who expect easy-to-use mobile experiences, and providing holistic, integrated digital lending capabilities, helping to address the market's changing preferences.

One advantage of the past ~10 years is that the industry is making strides to overcome the fear of mobile, with user uptake of mobile financial services soaring in global markets, including in the USA where, for example, Bank of America's digital channel now accounts for 26% of total sales, with mobile representing over half of these digital sales. And as another good sign for the lending sector, despite this growth, BOAs strategy to increase these numbers is centered around focused energy on even more advanced areas of digital account opening, like lending.

In an example of traditional cornerstone investors moving to an online and mobile financial services focus, Goldman Sachs CEO, David Solomon, recently said, “I think we’re in the early stages of building a digital platform for consumers that gives them more information, more tools are their disposal. Over the last three years we’ve built a digital bank with $55 billion in digital deposits, with $5 billion of loans; 4 to 5 million customers; a brand-new credit card platform and have launched a card with Apple. I feel like that’s pretty good progress over a short period of time.”

Traditionally, only professional investors could get involved in equity financing rounds, and it's clearly crowdfunding which has forged the path around this obstacle. In its simplest form, Crowdfunding connects startups with people in the market who have funds and believe in the plans of these businesses, and this simple model is expected to grow the industry to over USD 300 billion by 2025.

In the past, traditional investing could lead to a long, tiring, and often rewardless exercise. We believe crowdfunding innovation can change this, giving companies the chance to engage with investors when their ideas might otherwise never have come across the desk of a traditional investor. It also allows founders and their teams to validate their ideas before entering the market, while providing the advantage of converting investors to loyal customers and brand ambassadors by offering them incentives for their early show of support.

Equity crowdfunding is creating a new class of investor. There are genuine risks that many people who become involved do not have adequate investor experience to understand all of the implications of their investments, or, as a risk to the companies themselves, to be a positive influence on the future of the business. This places a new responsibility on those backing projects through crowdfunding platforms to educate themselves, through crowdsourced Due Diligence and progressive community conversation. Coupled with this level of necessary self-governing responsibility, crowdfunding has the real potential to become a reliable tool for venture capitalists to achieve a lasting ROI long into the future of fintech.

It is our objective at BELEGA to provide access to capital for developing market SMEs, and access to global investments for investors who want access to wider portfolio differentiation opportunities. The companies are being built today, we believe we can accelerate their growth, building our own sustainable crowdfunding business in the process.