Crowd Funding in the Offing

April 25, 2020

Crowd Funding in the Offing

(Published in the Financial Express in December 2018)

Dr. Shah Md Ahsan Habib[1]

A relatively recent and interesting development in the area of collaborative finance without the engagement of a financial institution is ‘Crowd Funding’. Remarkable development and use of technology in the financial arena and progress in social networking by using internet based platforms contributed in the innovation. Crowd funding is commonly defined as a method of raising capital through the collective effort of friends, family, customers, and individual investors. Broadly crowd funding might take three shapes: donation based, reward based, and equity based. Donation based crowd funding campaign are those where there is no financial return to the contributors. Generally donation-based crowd funding initiatives include fundraising for disaster relief, charities, nonprofits, and medical bills. Reward based crowd funding campaign commonly involves individuals contributing to your business in exchange for a reward, typically a form of the product or service that a company offers. Sometimes, reward based crowd funding is considered as part of donation- based crowd funding as there is no financial or equity returns.  Equity-based crowd funding allows investors to become part-owners of a company by trading capital for equity shares. Unlike the donation-based and rewards-based methods, as equity owners, investors of the venture receive a financial return on their investment and ultimately receive a share of the profits in the form of a dividend or distribution. Though peer-to-peer (P2P) lending is not always reconsidered as crowd funding, in some literature it is titled as debt-based crowd funding.

To many it may not be a completely new concept, however, it is new momentum in the context of changed technology and mindset of the key stakeholders. In most of the recent published documents, Michael Sullivan has been credited with coining the term crowd funding in the year 2006. It was basically a failed attempt for creating an incubator for some video blog-related projects and events through launching ‘fundavlog’, a funding scheme. The scheme was based on mutuality and shared interests and, funding from the crowd. Today the attempt is to relate the concept of crowd funding with the technology based web and social network. Evidences are showing that it is not more only about making friends or live-chatting, rather social networks have become platforms to support a broad range of social and economic applications and interactive functionalities.

In the initial days of micro lending there were certain such instances. Through the 1990s, emergence of popular messaging tools and social sharing platforms gave rise to some examples of cause-based or charity-based crowd funding. Since the early years of this century, crowd funding gave way to a surge of what came to be known as P2P lending. Several platforms were developed to facilitate crowd funding. As a micro lending platform, Kiva was launched in 2005 which is said to be the first platform to allow entrepreneurs to lend money to developing areas across the world.  ‘Kiva’ became one of the most successful micro-lending platforms that have raised millions through crowd funding, and with an outstanding repayment rate. This model was developed and expanded into what is popularly called as peer-to-peer lending, an alternative to traditional bank lending. One of the initial peer-to-peer lending sites launched include ‘Zopa’, ‘Prosper‘, ‘Lending Club’ etc. After initial struggling, these platforms started getting momentum since 2008. Actually, the term ‘crowd funding’ received popularity mainly following 2008 with the introduction of the platforms like ‘IndieGoGo’ and ‘Kickstarter’. These crowd funding platforms came into the scene with the goal of supporting creative entrepreneurs and innovative projects. In addition to that the P2P model initiated by ‘Prosper’ and ‘Lending Club’ started a new life during 2008-2009 when more and more lenders and borrowers started connecting directly via the internet avoiding the banks, and these were  registered with the securities and exchange commissions. Practically, the appearance of ‘Kickstarter’ and ‘Indie GoGo’ and the big push of the ‘Prosper’ and ‘LendingClub’ came up with the sign that the environment is ready to give crowd funding its momentum. Equity-based crow funding is a relatively recent development. ‘GrowVC’  and ‘Crowdcube’ are said to be initial platforms, launched in 2010 and 2011 respectively, starting what known as equity-based crowd funding. GrowVC was launched to support technology startups and help startups companies secure initial funding. Crowdcube, a business finance crowd funding platform initiated for businesses to raise equity finance. 

 Crowd funding is considered different from mainstream approach to business finance. It is well-known that for raising capital to start a business or launch a new product, preparation of a business plan, undertaking market research, and shopping the ideas are key steps that are not easy to comply with, and the common funding sources include banks, angel investors, and venture capital firms which mean the limited options to a few key players.  Crowd funding platforms, on the other hand, offers the entrepreneur, a single platform to build, showcase, and share resources, and thus streamlines the traditional format. With crowd funding, it seems much easier to get opportunity in front of a number of interested parties and greater ways to help grow businesses, from investing thousands in exchange for equity or other reward. This is particularly suitable from the point of view of reach and efficiency. By using a crowd funding platform it is possible to get access to thousands of accredited investors who can see, interact with, and share. One of the best things about online crowd funding is its ability to centralize and streamline fundraising efforts by building a single, comprehensive profile in a much more accessible format, offering tremendous efficiency in fundraising.

Despite its slow adoption in developing economies, crowd funding has been heralded as an opportunity to expand access to capital for entrepreneurs. In 2013, the World Bank published a report, ‘Crowd funding’s Potential for the Developing World’, which estimated a figure close to USD 100 billion crowd funding market in the developing world by 2025. Our neighboring country India which is having a booming start-up ecosystem grabbed the concept of online crowd funding quickly. Since 2010, several crowd funding platforms have emerged on the Indian web and are doing noticeably good. We also observe some initiatives of crowd funding in Bangladesh. BD Venture Limited launched a crowd funding platform ‘Oporajoy’ to raise funds, a donation based crowd funding platform in Bangladesh. Again, BD Venture launched ‘’ to help entrepreneurs to raise the necessary capital from the crowd to accelerate their businesses. FUND SME is an equity-based crowd funding platform that makes it easy for businesses to raise capital from its network and allows entrepreneurs to share their profiles and business plans with a network of investors, venture capitalists, and business supporters.

[1] Professor and Director (Training), BIBM ([email protected])

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