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What is crowdfunding ?

Crowdfunding is a way of fundraising conducted via an Internet platform, enabling a set of contributors to choose collectively to finance direct and traceable manner of identified projects.

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The crowdfunding

This method of financing involves:

A financier (who may be an individual or a company in some cases) who wishes to support a project to create or corporate recovery, a designer or corporate buyer

who does not have all the funds needed to launch the business, who does not want or can not use a bank or just want to test his project to the market.

The both meet on the Internet via a dedicated platform. The projects are presented by the holders and funders choose to fund one (or ones) that they like to live up to what they wish to make.

The simple operation of this form of financing also has the advantage of transparency to the financer. It knows what it funds and by choice and by its values.

How does it work ?

Crowdfunding is interested in all kinds of projects. Generally, matchmaking sites are thematic: cultural, social, environmental, innovative, digital, etc.

Three forms of contributions are proposed to funders:

A donation (gift or reward crowdfunding).

There are 3 types:

the unrequited gift, the gift with nominal consideration (a postcard, a t-shirt bearing the image of the company, etc.) and pre-sales / pre-order (product by example where the fundraising campaign was launched)

A stake in the equity of the company created (crowdequity).

There are 3 types:

- Capital investment (compensation in the form of dividends or capital gains realized on the sale of securities), bonds (compensation in the form of interest) or royalties (compensation in the form of commissions on sales of business),

- A loan (crowdlending).

There are 2 types:

the interest-free loan lending at interest without security or collateral. To run platforms charge a commission on the amount of money collected (5-12%).

What form of crowdfunding to choose a project leader ?

The choice to use a particular form of crowdfunding will be guided by the nature of your project. It is possible in some cases to use different solutions during the life of your project and needs.

The gift is ideal for testing the market and welcoming the public vis-à-vis your product or service. Donations collected will bolster your equity and help to create a leverage effect on other financing (bank loans, grants, etc.).

The average donation is about 60 euros and the average amount collected varies between 3000 and 4000 euros. The success rate would be 2 to 3 according Participative Funding France.

The loan usually allows finance expenses not taken into account by banks as liquidity needs for example or intangible investment projects. However it is necessary to have at least two balance sheets to claim it especially for paid loans. Please note, it is worth noting the absence of demand deposit and guarantee for the borrower.

For loans paid an average rate of 8%. The amount of paid loan is capped at EUR 2 000 and 5 000 for unpaid.

The stake to equity will be assessed to fund the development of a project to innovative or not, or little prized by traditional investors (property development, opening of branches, etc.).

The stake entitles in some cases to tax benefits for investors.

How successful crowdfunding campaign for a promoter ?

Before you embark on a fundraising campaign through crowdfunding, it is essential to know the engines of this type of funding and the best way to use it to your benefit and the benefit of all. A crowdfunding campaign runs in 3 steps:

the before, during and after the campaign.

Before the campaign: it should ask you about the maturity of your project (financiers support more easily the concrete projects), communicating your talents and your mastery of social networks, the existence of a personal network that can be mobilized quickly (composed of friends, potential clients, experts, etc.) and then your ability to free yourself from time to reach a minimum budget to communicate.

You will also need to ask you about critical fault points of what your campaign would have no chance of success: what is your need financing? Do you have a product to show? Do you have a story that makes you want? What counterparties can you offer ? Etc.

During the campaign it is important to be aware of the operating rules of the crowdfunding platform before embarking then define targets and an appropriate communication plan. Attention web is not everything, nothing can replace the physical contact, which can take shape around events and canvassing. A successful crowdfunding campaign is mainly based on your communication skills, do not underestimate this aspect!

After the campaign: that the project has found the funds or not, you will learn from the actions and returns obtained. It should also inform your funders of the outcome of your project and do not forget to pass the counterparties in a donation collection campaign and possibly meet.

What regulations and risk ?

Banking and tax regulations is a source of major constraints for structures offering financing platforms that must obey different rules:

prudential rules identical to those of banks: Detailed identification of the financier (credentials and home), anti-money laundering controls, anti-terrorism, etc.

control rules for the qualification of investors as crowdfunding is considered a risky investment.

The DGCCRF has on his site all the useful information concerning the risks related to a crowdfunding campaign.

You can also check the websites of the AMF and ACPR for more information about the applicable regulations.

Is crowdfunding profitable ?

Two elements must be taken into account in the calculation of financial performance:

- The risk (for project failure rates in particular)

- Expected return. To compare the different types of crowdfunding, you can use the

return / risk ratio, which can simply compare the performance of several investments

per unit of risk taking (risk budget).

The higher the ratio, the more attractive the investment is.

This ratio shows the equity loan as a very attractive investment tool, which previously was reserved for the banking monopoly.

D'aprés le blog financepratique

View of subscriber: Focus on Alternative Crowdfunding !

How an investor can we evaluate the different crowdfunding proposals to ensure the proper use of his money ?

Crowdfunding offers an alternative to traditional finance that can give meaning to money.

This note analyzes the potential risk and financial performance of different types of crowdfunding, seen from the perspective of an investor who wishes to participate as a donor, lender or investor capital.

In France there are more than fifty diverse platforms crowdfunding. In a previous post, we discussed how these initiatives have the potential to give back to finance a sense, a social, human and innovative missing to traditional financing channels

For this six different types of crowdfunding is analyzed by financial criteria of risk and return shown below.

Participatory gift without consideration
The gift in exchange, also known presale
The equity loan without interest
The equity loan with interest Giving against royalties
The capital equity investment

It does not ignore the moral satisfaction, not financial qu'apportent the crowdfunding projects, particularly social finance projects. But when it comes to money, hell is sometimes paved with good intentions. Solidarity and enthusiasm for innovation does not stop to make sure that money is well spent, instead.

Participatory gift without consideration

The purpose of this type of crowdfunding can be to create a prize pool for a wedding gift or birthday, as on Leetchi, to support humanitarian causes, like JustGiving (USA) and United Donations (FR), or even to fund artistic projects, like Proarti.

Average donation:
A few dozen euros. average collection:
A few hundred or thousand. Risk: Moral and low, to see their money wasted by the recipient of donations.
Yield: No material profit, but some platforms allow you to enjoy tax breaks related to charitable donations (60% or 75% of the donation).
high moral satisfaction: Give without expectation of return is good!

Warning: While Leetchi fee 4% commission on the amounts collected, some platforms, such United Donations, take commissions of nearly 10%. This may seem high to mediate in charitable donations but is due to the cost of project selection and monitoring conducted by small charities that do not have the same means to make known that large charities type AICF or Doctors of the world.

The gift in exchange, also known presale

This type of crowdfunding is to solicit donations, for example to finance the production of a CD, while committing to provide later consideration, such as the CD that has been produced with donor money. It is the most common form, probably because the most fun, participatory financing. She took off thanks to the success of US sites Kickstarter and Indiegogo that financed projects such as the production of the Pebble watch worth several million euros. This category is illustrated in France by companies like Ulule and KissKissBankBank.

Average donation: A few dozen euros.
average collection: A few thousand, but can be up to several million.
Hazard: No completion of the project, disappointment, loss of expected return. Carry out a project remains difficult, although it is financed by the crowd. In 2011, less than half of the projects funded on Kickstarter led and delivered the expected counterparties. Ulule has a success rate of 66%: the rate campaigns have reached their fundraising goal, not the project that delivered rate counterparties.
Yield: Financially weak. The consideration is often a poorly discounte whose value is directly related to the donation. But there is a great moral satisfaction and a lot of fun to support a creative project in which we believe.

Note: Again, the commission used to cover the costs of platforms are not negligible, eg 5% for Kickstarter and a sliding board between 8% and 5% for Ulule. It should tarnish account, even if these are paid by the project developer, not by the donor.

The equity loan without interest

It is a variant of the gift as the lenders waive receiving interest for the money they lend. Also in some cases, for example, on the Babyloan platform that collects money to fund humanitarian microloans, especially in France and abroad, in developing countries, contributors finance the operating costs of the platform. For Hellomerci, a lending platform solidarity between individuals, it is by against borrowers who pay the operating costs of the platform. The loan which is not entirely free for them.

Average loan: A few dozen euros.
average collection: A few thousand.
Hazard: No repayment of the loan by the borrower defaults. The risk can be mitigated not intermediaries and not directly finance Babyloan project leaders, but of Microfinance Institutions (MFIs) undertake to repay the lender even if the project fails micro-entrepreneur. The risk becomes the bankruptcy risk of the MFI.
Yield: No financial advantage and, where appropriate, a cost participation fee for the platform. moral satisfaction to support community projects that help the beneficiaries to undertake and (re-) become economically independent. The group loan empowers more than a gift. The borrower feels both supported and engaged with the community lenders.

Warning: The platforms collect commissions on payments to borrowers. For example Babyloan takes a commission on each payment by the lender which is 10% to 20 euros at 3% above 200 euros. In this case, refunds are amputees commissions. Hellomerci a sliding fee commission of 6% to 3% of the entire loan. In this case, the cost is borne by the borrower. These fees are justified by the need to select viable projects, monitor their development, and especially to service the loans during their time interacting with a large number of small lenders.

The equity loan with interest

This is the form of the more mature crowd funding since it began there nearly 10 years thanks to English and North American pioneers like Zopa, Prosper and Lending Club. These lending platforms are called "peer-to-peer", French "peer" as they put in relation directly lenders and borrowers. They now brew several billion dollars. In France, loan site owner Loan Union granted 45 million euros of credit in 2013.Chaque equity loan platform has its own method for assessing the risk of the borrower fix the rate of interest lending and structuring loans to spread risk among lenders.

Average loan: A few hundred or thousand.
average collection: A few thousand or tens of thousands of euros.
Risk: To spread the risk lenders, loans are divided into small holdings. Global default rate (loan defaults) varies considerably depending on the platform, its ability to select and monitor borrowers. According to the IOSCO Research Department, the default rate of this type of financing varies between 0.2% and 7% in the US, but it rose to 30% in 2009, following the 2008 crisis. another risk is the lack of liquidity. The money is partially blocked for the duration of the loan, unless the platform permits the resale of holdings.
Yield: One can expect to receive between 3% and 5% interest, net default rate. This level of interest rates makes this form of crowdfunding investment quite competitive. This form of equity loan brings satisfaction to grow their savings while supporting individuals or companies that have difficulties to obtain financing in the conventional circuit.

Warning: More Platform equity loans grows, it tends to look like a traditional bank. Thus the world leader, Lending Club accepts a borrower of 10; the most conservative bankers serve on its board of directors and is preparing its IPO this year. So there is sometimes a gap between marketing rhetoric and reality of some platforms of crowdfunding. For example, Ready Union, which is de facto a bank, in terms of a credit institution, aggressively critical "banks" and compare interest rates with those of the revolving credit - the highest rates consumer credit - while lending conditions are comparable with those for personal loans of banks, much lower. Ready Union practice according to press a commission rate of 2%, but this information does not appear clearly on the site, which casts doubt. PrêtPME seems to be more transparent and displays a very reasonable commission rate of 3%, which, according to its leaders barely covers the selection of projects costs, collection and loan administration.

Giving against royalties

The project leader, such as a video game developer, not a fixed counterpart but offers royalty that is to say a profit on sales of this game in the future. The French pioneer MyMajorCompany made this famous funding model by launching the singer Gregory and others. Meanwhile, the model is out of breath, and was largely replaced by the gift in exchange easier to manage.

Average donation: Very variable, from tens to a few thousand.
average collection: A few thousand or tens of thousands of euros.
Risk: High. Very few projects are coming blockbusters to generate royalties.
Yield: One can get lucky and bet on good project that will bring five times the bet or more, as was the case of those who have helped produce Gregory MyMajorCompany on, but this is the exception rather than the rule . We keep the moral satisfaction to participate in an adventure and to support a project we like.

Warning: It is complex to follow in time and in a transparent production costs, sales, profits, and thus the micro-royalties attached to each contributor. This led to controversy about this financing model on MyMajorCompany.

The capital equity investment

This is the most ambitious form of crowdfunding. It allows a growing company using a platform like WiSeed, SmartAngels, Particeep or Anaxago to raise money by opening its capital to a large number of small investors, who then become shareholders. The law of consumer protection currently imposes strict limits on such funding. Thus the law only allows individuals considered "qualified investors" to invest with professionals on capital financing platforms because of the high risk level. The qualification of the investor based on his statements regarding the size of its financial wealth, knowledge and experience in terms of investment in shares and other financial instruments to risk.

Average investment: A few thousand or more. average collection: a few hundred thousand euros to several million.
Hazard: The equity of a company is a long-term investment (five years or more) and high risk of loss of some or all of the capital. Indeed small businesses and particularly startups are fragile. The IOSCO report estimated that in the USA, one in two businesses financed in this way fails. Further capital investments in private companies are generally illiquid, they can hardly sell its stake if one wishes to get out.
Yield: The yield any dividends will come from and especially of surplus value, the rising share prices of successfully funded companies. The return on investment is in principle similar to that of a venture capital fund (venture capital). Expect it to be very variable, ranging from negative returns to positive double-digit returns (10% or more). For the individual investor, this performance may be boosted by tax cuts on income and the solidarity tax on wealth (ISF) to be granted under the investment in SMEs. Finally, do not overlook the satisfaction of being associated with the development of start-ups and other dynamic companies.

Warning: The equity investment platforms perform normally a big job of preparation and monitoring capital investment which includes the audit of the company and its financing plan, selecting the best projects making provision of the necessary documentation to investors, drafting contracts, monitoring of investments etc. For these intermediary services investment platforms collect about 5% of collected funds. SmartAngels such practice a sliding scale that ranges from 5% to 0.5% depending on the size of the collected funds.

Conclusion

Crowdfunding allows an investor to make sense of his money. But beyond the good intentions by each other, the investor will prefer to ensure that its money is well spent.

The investor will check first the added value of the platform, including the ability to:

- Select projects that fit its mission: A quality indicator will be for example the number of projects and the number of contributors.

- Animate and carry out fundraising: a quality indicator will be the projects rate reaching their goal of fundraising.

- Manage payments and track the projects in time: A quality indicator is the project success rate, measured for example by the provision of counterparties, loan repayment rates, growth rates and corporate profitability funded.

Beyond the validity and transparency of projects for funding, it seems essential that the crowdfunding platform to be as transparent as possible on itself, its structure, functioning, financing. We want to know:

- Its legal status: she is an authorized credit institution (clear a bank), an authorized payment institution, an intermediary in banking operations and payment services (IOSBP), a financial investment advice, or a simple " advisor equity investment. "

- Its financial partners: If the platform is not a bank or a payment institution, what are the financial partners?

- Its cost structure and its commission rate: The rate of commissions charged by the platforms on the funds collected vary widely. These fees are usually charged to the project leader, but it is important to know.

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