Crowdfunding unequals Crowdfunding
Crowdfunding has become a constant in early project financing in Germany over the last year. Especially in the startup-scene it got quite some attraction as an alternative funding model for early companies. And the more relaxed rules around project funding in Germany in comparison with the US (yes, we are more relaxed with our rules for ones), also made it something unique and looked for internationally. But not everything we call crowdfunding today is the same and works for every model equally. Time too look into this.
Generally you can separate between three different ways, we currently consider crowdfunding: Pre-Sales, Social-Funding and Crowdinvestments.
Is a very classic model actually and just got “re-branded” by making it available to a bigger public. In manufacturing this is often called manufacture-on-demand (or print-on-demand for publishing) and has been around since the early eightieth as a customer proposal. The main idea is that you sell your product and receive money for it, even before you’ve started producing it. So you collect a bunch of money upfront and with that get into production process. The internet only made it available to a wider crowd and the products are more techie and geeky nowadays and usually do not require more than a working prototype ready for mass production.
But also merchandise-products around this product as a “funding premium” fall under this category. So even if you just receive a shirt for contributing your money for this project (and not the actual product), you are simply buying a t-shirt pre-production. A good example for this kind of crowdfunding would be every project on kickstarter, the startnext model and the fan-funded movie and book projects (like the famous Stromberg- and Adolf-Animation-Movie-Example).
Then there is social crowdfunding, with betterplace.org being the most known example for this in Germany. The way this works is you give a donation for a charity for a specific project or person to do something good for society, for example build a playground for kids or to finance a bike line on a street, which the local government wouldn’t be able to afford. But also scholarships and learning material is funding this way now. And it is a great way not only for giving more exposure to what charity (or government) does but also to give the donor a closer connection to it. The main difference to the pre-sales model lies in the fact that the donor might not get anything back for it, aside from the good feeling of having something good and a tax receipt.
Also this model is barely new; bake sales and for-charity-auctions and -tombolas have been around for decades. They just haven’t had that exposure yet. What is new in this model is that is becoming a way to do/manage and organise public funding. So you are not looking for the rich person in your village anymore to be the super-nice guy, who builds the local park, but people and local companies fund it themselves. As in a put-your-money-where-your-mouth is. In a world of spending cuts all over governments this has become an alternative to create local, social infrastructure requested by the citizens.
Last but not least, the only model that is a real investment-model and what so many american investors refer to when they speak about “the German crowdfunding”-model: a company, often a startup, offers shares or share-like-financial-papers in an almost public auction to the “anonymous”-crowd when having nothing else than prototype. Gründerszene compiled a great list of the biggest one of them here. Out of all of the crowdfunding models it is the most risky (for the investor) but also the most attractive one, as the promise is that the papers increase in value and can not only be sold (often after a stalling period of 5+-years) but also yield a revenue. And as you are supporting a very young and small startup, you can get these papers rather cheap. Some platforms offer tickets from 250€ and less.
This is really new as it puts the otherwise anonymous private investor, who just buy a bunch of fonds, take back the power to distribute their power per company or per project. As in so many cases, the gate-keepers and middle-man are removed. But that also gives more responsibility into the hands of the investors in terms of portfolio- and risk-management for their assets.
All kinds of crowdfunding have their definite sweet spot and best case use. For a manufacturing startup or something that creates a physical product, the pre-sale is probably the most attractive, while for most software- and internet-startups the crowdinvestment is probably the only viable option. And while much has been said about pre-sale-crowdfunding, very little discussion - aside from general praise - has been happened around those crowdinvestment models, we are propagating in Germany. So next week, I’ll take a closer look into that and talk about the risks and problems I see with that model, as we are executing it right now.