Crowdfunding: A New Business Paradigm?

With recent calls for regulation, does crowdfunding represent a new business paradigm? 

By: Ringo Bones 

For the benefit to those who are still not in the know, crowdfunding is the practice of funding a project or a venture by raising monetary contributions from a large number of people typically via the internet. One early-stage equity expert described it as “the place of raising funds from two or more people over the internet towards a common service, project, product, investment, cause and experience or SPICE".

The crowdfunding model is fueled by three types of actors: the project initiator who proposes the idea and/or project to be funded; individuals or groups who support the idea and a moderating organization – the platform – that brings the priorities together to launch the idea. In 2013, the crowdfunding industry grew to be over 5.1 billion US dollars worldwide. According to WordSpy.com, the earliest use of the word “crowdfunding” was by Michael Sullivan in funday log in August 2006. 

The Crowdfunding Centre’s May 2014 report identified the existence of two primary types of crowdfunding – rewards crowdfunding where entrepreneurs pre-sell a product or service to launch a business concept without incurring debt or sacrificing equity / shares and equity crowdfunding where the backer receives shares of a company, usually in its early stages in exchange for the money pledged. The company’s success is determined by how successfully it can demonstrate its economic viability – as in 2005 era wisdom of the crowd business paradigm.  

During the first quarter of 2015, they had been calls for reform of the burgeoning online crowdfunding scene due to the alarmingly high failure rate of hastily set-up equity based crowdfunding schemes. Adrian Hillcoat, chief executive of e-Go has a quarter of a million pounds invested via crowdfunding in his company whose current “crowdfunded project” is a powered ultralight aircraft. According to business pundits, start up companies has a higher failure rate than day trading. By way of comparison, for every 8 day traders, there is one successful day trader, while 7 of them will lose all of their money. At present, the UK has the strictest crowdfunding rules in comparison to the rest of the European Union and to the rest of the world.