The "crowd" potential in finance
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The "crowd" potential in finance
Monday, 12 february 2018 | Redacción CEU
Funding is that obstacle which the entrepreneur usually stumbles with, when trying to start a project. The crisis has not contributed to make this hurdle easier to overcome, but it has helped new ideas to be put into practice. For some years, a new "crowd" current based on the benefits of collective actions aims to offer a solution to this and other problems. Crowdfunding now stands as the new financing hero. Not only it offers an alternative to traditional channels, it also becomes a new tool in the financial sector that opens a new range of possibilities. What does it consist on? What are the different types of collective funding? How has this "crowd" phenomenon transformed the financial scenario?
Sharing economy, economy on demand, gig economy, economy of platforms, circular economy,... There are many names to call it, although each concept has its own particularities. It is a new movement based on the power of the coordination between different people on a massive scale. A trend that is changing the rules of the game, in large part, thanks to the unstoppable development of digital technology. Its promoters can reach specific goals without more intermediaries than the platforms –and their administrators–. Something that might have been difficult otherwise, and in some cases even impossible. The phenomenon "crowd" sets out new challenges, also new alternatives.
With the little help of a crowd
Crowdsourcing, crowdthinking, crowdworking, crowdcreating, crowdbuying,... All of them are terms that designate new practices within the framework of this collaborative germ, known as the "crowd" world. A space that offers new channels in traditional sectors and that as the time goes by, grows and settles in our society. The finance sector, increasingly affected by the digital technology development and the FINTECHs arrival, is also influenced by this culture of the crowd and, in a very particular way, by the crowdfunding.
In 1997, the British rock band Marillion made a pioneering action in the world, raising 60,000 dollars –destined to cover the costs of their tour in the US– through an action on the Net. The band asked their fans if they would be willing to help fund their tour in North America and, against all odds, the response was positive. This initiative would be remembered as the first crowdfunding in history. Centuries earlier, other experiences had showed the potential of this type of proposals on the funding of projects. Mozart and Beethoven offered manuscripts or pieces of their works to those small patrons who helped them financing their concerts and compositions. The own Statue of Liberty was able to rise thanks to the initiative from the publisher Joseph Pulitzer offering to write the readers' name who donated money for the pedestal construction in his newspaper and giving them replicas of the statue in miniature.
The different financial crowds
Crowdfunding is a type of collective financing alternative to traditional methods and generally promoted through digital platforms. It is a tool that allows a company or individual to make an economic contribution to a project that interests them through a donation in which they do not expect any type of return, as in the case of campaigns driven by NGOs, or in exchange for a pre-purchase or some type of reward. This type of initiatives, in addition to enabling the implementation of innovative projects, can serve as a test or market research for the launch of a new product.
The platforms that offer this type of services on the Internet are responsible for valuing the proposal, deciding whether to publish it or not on their webpages and establishing and regulating the determined time to obtain the necessary funding for the project going forward. Among the most known we highlight the American platforms like Kickstarter, that promotes initiatives focused on creativity, or Indiegogo, which has the particularity of giving the applicant the money collected even if it does not reach the goal, with the counterpart of having to face the promised rewards even if it has not reached the amount set. In Europe, Ulele is the platform that moves more important figures, with the premise "all or nothing" offers projects of a very varied nature. Verkami and Lánzanos are examples of some of the best-known Spanish platforms.
There are two variants of crowdfunding that are increasingly gaining presence in the Spanish financial landscape and that deserve a special mention, crowdequity and crowdlending. The first, known also as equity crowdfunding, is characterized by offering part of the capital of the company to the investors of the project. If the project does not prosper, investors lose the capital invested. The benefits, either in the company's shares or a percentage of the turnover, are obtained based on the success of the company. This is a good financing option for companies that want to increase their capital or start-ups that want to start their business activity. CrowdCube is an example of a platform that works with crowdequity, allowing investors to make online investments knowing at all times what their money is being used for. These crowdfunding initiatives have to provide a lot of information and data about the projects so that investors can trust them.
Crowdlending is an alternative to the funding of banks or any other financial institution based on the equity loans through small collective contributions. The conditions of these loans are agreed between the parties and the money is returned on a monthly basis along with the previously agreed rate. Compared to crowdequity, the level of risk assumed by individuals or companies are lower, because lenders get the agreed payments within the set period. Its attraction for investors lies in the fact that it can offer a higher profitability than the one of the banking products. Crowdending is appropriate for projects that already have solvency, offering some guarantee, but do not want or can not access to bank loans. Arboribus, Grow.ly and MytripleA are examples of these types of platforms in Spain.
Collective financing is increasingly important in Spain, in fact, it is gaining strength as a new alternative to the real estate business. This is evidenced by experiences like the ones from Housers. If you are interested in getting to know how it works and what its particularities are, you can access here to the interview, conducted by Antonio Díaz-Barceló, Director of the Advanced Program in New Real Estate Business Management at CEU IAM, to Álvaro Luna, Founding Partner of this platform.
At the CEU Institute for Advanced Management, we offer you the possibility to learn more about the "crowd" world and collaborative finance. Visit our Advanced Program in Digital Finance, FINTECHs and find out more.
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