Not long ago, a project called the Coolest Kooler raised over $13 MIO on the Kickstarter platform. It turned out that the company in fact promised too much to its backers. In order to deliver the promised rewards, they would need additional $15 MIO. The product development was nowhere near the point at which the Kooler team could have correctly predicted their market price. One of the latest crowdfunding failures happened on Indiegogo: Skully smart helmet raised over $2,5 MIO with additional $11 MIO from investors, but now they filed for Chapter 7 bankruptcy. To quote one of the sources, BGR: “Where did that money go? Among other things, it paid for expensive cars and trips to hot destinations, but also for personal expenses including rent, limos and strip club attractions.”
The Coolest Kooler raised over $13 MIO on the Kickstarter platform. It turned out that the company in fact promised too much to its backers. In order to deliver the promised rewards, they would need additional $15 MIO.
There are many differences between crowdinvesting and crowdfunding, but in this short article we will focus only the differences in the types of projects using the two financial mechanisms. Mainly, that crowdfunding uses the crowd to test a potential product or service in the form of gathering pre-orders while crowdINVESTING focuses on gathering investments for companies which are already present on the market and have a high potential for growth.
Crowdfunding is now made possible on over 1400 platforms worldwide, ranging form specialized platforms just for microbreweries or only for supporting new musicians, to full-blown mass crowdfunding platforms that cover all genres of projects like Kickstarter or Indiegogo. All of them have advantages such as large communities, but they also have their dissadvantages, like focus and needs of their community, the sheer amount of their projects or the quality of said projects. These platforms allow the presentation of projects in their idea, prototype or rarely end-product format. Everyone who pledges a certain amount, essentially pre-orders the service or product they would like to see would make it to the production phase. Out of 100 launched projects 35 successfully raise the funds, out of these 35 only 10% on average fullfill their promises to their backers. This might not be very good for the backers or projects, but big platforms need the number of projects to be large since they make money by charging success and operational fees. The typical crowdfunding platorms do not in any way share the risk with the supporters or the project. If the project is successfully funded, they pay a success fee to the platform. Whatever happens next with the delivery of promised rewards is between the backers and the projects. It is an acceptable risk for investments which averages $ 79 dollars.
Out of 100 launched projects 35 successfully raise the funds, out of these 35 only 10% on average fullfill their promises to their backers.
With crowdinvesting platforms, the campaigns and investments are quite different. Investors basically lend an amount (from €100 upwards) to the company, based on a subordinated loan contract. It states that the investor, if the company fullfills its goals, will get back the loaned amount, annual interest and an equity kicker, which is a financial reward based on the companies’ growth of profits. Just the annual interest which is min 4,5%, makes investing over platforms like that viable investments. The average invested amount on CONDA, which is the fastest growing and only pan-European crowdinvesting platform, is € 1,275. On average 86 out of 100 companies are successfully funded, and the lowest funding goal is € 50,000.
Platforms which help companies get funded through crowdinvesting, rely heavily upon the fact that the company fullfills their promise to their investors. That is why only vetted companies are allowed to present their service or product. They have to have some traction on the market, their team, business plan, financial and legal affairs have to fullfill a certain criteria and most of all, the advisory boards of crowdinvesting platforms need to agree, that the company in fact has a large chance to grow in profits in the next 3 – 7 years, and will be able to repay the invested amount with the equity kicker.
The average invested amount on CONDA, which is the fastest growing and only pan-European crowdinvesting platform, is € 1,275. On average 86 out of 100 companies are successfully funded, and the lowest funding goal is € 50,000.
As mentioned previously, both types of financing have their advantages, but crowdinvesting at this moment, is helping realize high-quality products and services from start-ups and well established companies, which is motivating a rising number of people with at least €100 to spare, to invest into growth of SMEs and faster development of good solutions.