Crowdfunding
Business: AQA A Level (2023 Specification), topic 5.3.3
Crowdfunding
Crowdfunding is an alternative way for businesses to raise capital by bypassing traditional banks. It collects small amounts of money from a large number of individuals, usually via online platforms.
Definition
- Crowdfunding involves raising finance by asking a large number of people for a small financial contribution.
- This process is typically managed through dedicated online platforms where entrepreneurs pitch their business ideas to the public.
- Entrepreneurs set a financial target and a time limit, using social media to market their campaign and attract potential backers.
- Sometimes reward-based platforms offer products, experiences or shares in the business in return.
Types of crowdfunding
- Reward-based: Backers receive non-financial rewards, such as early access to a new product or exclusive merchandise.
- Equity-based: Investors contribute capital in exchange for a small percentage of share capital or equity in the company.
- Debt-based: Also known as peer-to-peer lending, where individuals lend money to a business with the expectation that it will be repaid with interest.
Advantages of crowdfunding
- Market validation: It allows businesses to test public interest in their product ideas before starting full-scale production.
- Marketing exposure: Launching an online campaign helps build a loyal community of customers who act as brand ambassadors, generating publicity and social media attention.
Disadvantages of crowdfunding
- Idea theft: Publicly sharing a business model on an open platform exposes the concept to competitors who may copy it.
- Delivery pressure: Failing to fulfil promises or ship rewards on schedule can cause severe damage to a brand's reputation.
- No guarantee of success: The business invests significant time and effort in creating the campaign with no certainty of raising the money.
Real-life examples
- Brewgooder: The craft beer company famously bypassed banks by using equity crowdfunding campaigns to raise millions directly from customers.
- Monzo: Raised £1 million in just 96 seconds via equity crowdfunding in 2016, rapidly increasing investor value as the digital bank expanded.
- Chapel Down: Secured £3.9 million from over 3,500 backers, demonstrating how campaigns can successfully convert loyal customers into invested shareholders.
Test yourself on Crowdfunding
How does crowdfunding provide 'market validation' for a business before full-scale production begins?
Which of the following is a specific risk or disadvantage associated with publicly launching a crowdfunding campaign?