Over the past ten years, crowdfunding, which enables many individuals to collectively finance a new business concept through an intermediary platform, has transformed into a prevalent way of funding a wide array of start-ups, including those aspiring to seize a place in the sun in the financial sector.
Many big names in the financial ecosystem have already grown and prospered due to crowdfunding and continue to raise massive amounts for new ambitions.
Indeed, crowdfunding is not only one of the most efficient ways to drive necessary capital, but it is also a good chance to test the market before entering and find out whether the offer of services and products responds to the needs of potential users.
Crowdfunding vs. traditional financing
Traditional fundraising for a business idea means pitching numerous investors, banks, or venture capitalists for an impressive sum. In other words, an individual with a concept in mind seeks voluntary financial subsidy from banks, established businesses, foundations, etc., to get budgets for launching or expanding a business.
The sources of traditional fundraising – loans, venture capital, and angel investors – always imply that the investors primarily focus on the idea that can generate revenue. Moreover, since the investors own a stake in the company, they get the right to control all business decisions and arrangements.
The crowdfunding business model relies on three types of players: the idea proposer who provides the original blueprint that needs financing, potential investors interested in the concept, and a digital platform that brings all parties together to kick-start the new business venture.
In crowdfunding, the small entrepreneurs always showcase their idea by posting online all reference information to share the innovation and profitability with a large group of people.
By and large, crowdfunding initiatives can be divided into three main groups:
- Equity-based: In the equity type of crowdfunding, the contributors invest their budgets for an equity stake in a business.
- Rewards-based: This type implies the contribution of money in exchange for a ‘reward,’ resulting in the product or service released by the company.
- Donation-based: Donation-based crowdfunding means fundraising for nothing in return.
Indeed, fintechs as companies with high scalability potential and innovative business models are suited to both traditional funding and crowdfunding options. On the one hand, the reason for this lies in the high potential returns for investors. On the other hand, modern and user-friendly financial products can build a strong community and enhance the fintech’s relationship with its future customers.
Nevertheless, since crowdfunding has several unbeaten advantages, it may become a better option for new players striving to get on board.
Pros and cons of crowdfunding for a fintech business
When considering raising finance for a business in the financial landscape through crowdfunding, there are a number of factors to take into account. That is why, despite apparent advantages concerning the enthusiasm and power of the community, it’s critical to approach the issue in a balanced and adequate manner.
“+” Simplicity of finding investors for projects of any potential
As compared to traditional fundraising that requires much effort to persuade investors who are primarily interested in the return of investment, crowdfunding provides the opportunity to find budgets for any project or idea that responds positively in a community but is considered illiquid in a traditional funding scheme.
Moreover, in traditional fundraising, a focus on revenue rather than on the innovative, engaging, and thought-provoking idea can ruin a business that may generate significant profit in the future.
“+” Manageability and control over the key decisions
In crowdfunding, the business control and management remains in the hands of the promoters. At the same time, in traditional fundraising, the investors own a stake in the company, so they get the right to control the business decisions and have the power to reject any initiative if it seems unbeneficial for the stakeholders.
“+” Impressive outreach and genuine feedback
Crowdfunding allows idea proposers to reach a large audience in just several motions by publishing particular posts, videos, ads, information, and other relevant details. In other words, the idea becomes visible to everyone interested in supporting a business idea, enabling to get genuine feedback and the opportunity to tweak the promoting strategy or services if required.
As opposed, in traditional fundraising, only a few individuals, banks, or potential contributors are involved in evaluating the concept, which again may result in destroying a business without a chance to give it a go.
While crowdfunding is far less risky than traditional approaches and usually does not imply repaying investors in case of failure, indeed, it can be a huge challenge at any stage.
“-” Pre-launch study and time-consuming research to hit the community
While crowdfunding initiatives can be launched fast with no significant efforts involved, it may take much time to conduct proper research regarding what audience to target and what features to offer to stand out from the crowd. Furthermore, it is vital to provide a working business plan that will ensure uniqueness or advantage over anyone else.
“-” Risk of failure and impossibility to raise funds required
Although crowdfunding is an effective way to generate funds, it is not very beneficial for companies wishing to grow. In addition, most start-ups find it difficult to raise enough money, as in most cases, funders donate small amounts of their ‘investment portfolio’ without expecting any return. Therefore, the funds invested by an individual can be far smaller than expected.
“-” Time required for raising funds
Crowdfunding takes more time to achieve its goal. With the exception of a few campaigns, most initiatives take weeks or even months to complete. Besides, fund seekers constantly need to promote their products or services and convince people to invest. However, if the campaign is successful, the campaigner may receive investments within a short period of time.
What to bear in mind for a fintech if intending to participate in crowdfunding
When it comes to raising funds through crowdfunding, especially for a fintech player, it is vital to give the community a unique feeling to be involved in something new and ground-breaking.
Besides, ongoing communication with contributors, customers, and community is a must, as it will always result in a new perspective on business development. That’s why it is crucial to be clear, open, and honest, especially about the risks involved in a project.
What to expect in the future?
With rapid development and volumes that double almost every year, crowdfunding is experiencing a powerful explosion in interest, resulting in the emergence of multiple crowdfunding platforms that bring together start-ups seeking alternatives to venture capital.
As technologies evolve, the financial sector has acquired more opportunities for new players to get on board and for innovative products to hit the industry. Furthermore, due to crowdfunding initiatives, it has become possible to establish a strong relationship between fund seekers and contributors who help bring creative projects to life.
And even though some experts assume that crowdfunding won’t replace skillfully managed investments funds any time soon, it is already a good chance to test the market for unique financial technologies and build up a decent audience around new products or services.