To understand the new forms of financial activity we have to look back to crowdsourcing, the precedent to crowdfunding. It consists of outsourcing the tasks of an organization through an open call to get the collaboration of a group of people (crowd) in carrying out activities related to production.
The main advantage that we can find in this participation model is the meeting of the most suitable people to carry out this task or to correct those problems that require specialization. This meeting is not possible without the help of the Internet and IT, which play a very relevant role in the development of this meeting, since they allow a fast and excellent communication channel for organizations and people, thus achieving a free contribution from collaborators in the projects.
We can define crowdfunding as a form of collaborative and collective financing in which project creators request financing from users (crowdfunders) at the meeting point where they request it, this meeting point being an open and public place to crowdfunders who interact in it.
Collective financing refers to the pooling of financial resources to support promoted projects; it is collective since the money providers participate voluntarily, as stated, with an established amount, which leads to the investment risk is therefore distributed and the risk of loss is limited.
The meeting point where the collective and collaborative financing is requested does not have a direct interest in the third-party projects that are promoted, acting as mere intermediaries and promoting projects that aim to improve society. In the same way that crowdsourcing, without the Internet crowdfunding and new forms of investment, such as crowdlending, would not have had the strong momentum that they have had. The Internet has become a fast and efficient communication channel that makes it possible to convert the meeting point to web platforms that connect projects and crowdfunders.
These new and alternative forms of financing are born from the organization’s search for resources since it cannot find them in the market or decides to trust these new resources in the first instance, creating a new form of financial disintermediation.
The crowdfunder contributes a limited amount to the project and, in return, they receive a remuneration for the contribution, if any, or a series of advantages among which is the use or enjoyment of it in the first instance, before it is promoted to the public, as long as the project is carried out. The intermediary, the meeting point, charges a small commission from the contributions that the promoter of the project has received.
Depending on the remuneration we can divide the crowdfunding into the following types:
- Donation-based crowdfunding.
The crowdfunder contributes to the project without receiving anything in return since, in general, they are actions aimed at social interest. The intermediary creates and facilitates the space to the interested organization, providing it with the payment systems it needs and technological support in exchange for a monetary sum.
- Rewards-based crowdfunding.
It is the most popular of the types, offering the crowdfunder a reward if the project is carried out; this means that they receive at least 100% of what the creator of the project asks for within the established period. However, if they do not receive the necessary contribution or the project is not carried out within the established term, the contribution will be returned to the crowdfunder. If the project is carried out, the money collected is transferred to the creator of the project without the costs of the meeting point service.
The earned reward is not economic and can consist of a good, such as a copy of the album, a service, assistance to the theatre play financed by this method. This reward will depend on the contribution received and has a series of ranks that, once reached, will allow you to unlock greater rewards. Let’s imagine a music album project, to raise, for example, 10,000 c.u. and offering rewards from the first euro contributed up to 100 c.u. If we contributed 1 c.u. they would send us a thank you letter, with 5 c.u. we would get the album and with 100 c.u. a VIP ticket to one of their concerts.
- Equity crowdfunding.
The creator of the project requests capital through the meeting points to carry out a business project, and the crowdfunders will receive in consideration based on the amounts contributed a stake in the project. Those interested in carrying out this business project send a request, together with a business plan, to the intermediary where the project will be published and the intermediary evaluates whether its publication is feasible based on whether it considers whether it is profitable or not.
Unlike the other types of crowdfunding, intermediation brings with it a series of professionals who will advise the project creators, also helping with the design of the campaign and other services associated with the meeting point where it will be published. All these services carry a cost with respect of the amount of financing received.
Another difference is the term and the amount; in this type of crowdfunding it is not necessary to collect 100% within the established term; there is the possibility that the minimum is 90% and that the maximum may even exceed 100%, up to a limit, in case of excess demand.
- Peer-to-peer lending or crowdlending.
In this class, the contributions are aimed at financing projects in the form of a loan; therefore, the project creator has an obligation to reimburse the contributions within the previously announced deadlines and at the interest rate marked in the publication. However, when we exclude the interest rate we find the term social lending, which facilitates access to financing for those sectors that cannot find it in the traditional system.
In the same way as in equity crowdfunding, before accepting the publication of projects, the platform will carry out a study to analyse their solvency, among other metrics, and thus classify projects according to project risk. We must remember that even if a profitability is marked, it does not mean that it is assured, since it is merely an expected profitability.
