Last modified:Tuesday 6 October 2020
What is crowdfunding?
Crowdfunding, literally financing from a crowd, is a collective financing method allowing multiple investors to finance or support a specific private project, mainly through an automated web platform and social networks. Projects can be of any type (commercial, social, cultural projects, etc) and the amounts sought are usually limited (from a few hundred to a few tens of thousands of Euros).
Main types of crowdfunding
Individuals donate to a project or business with expectations of receiving in return a non-financial reward, such as goods or services, at a later stage in exchange of their contribution.
Individuals donate small amounts to meet the larger funding aim of a specific charitable project while receiving no financial or material return.
The crowd lends money to a company with the understanding that the money will be repaid with interest. It is very similar to traditional borrowing from a bank, except that you borrow from lots of investors.
Sale of a stake in a business to a number of investors in return for investment. The idea is similar to how common stock is bought or sold on a stock exchange, or to a venture capital.
Profit-sharing / revenue-sharing
Businesses can share future profits or revenues with the crowd in return for funding now. Debt-securities crowdfunding Individuals invest in a debt security issued by the company, such as a bond.
Offer businesses the opportunity to combine elements of more than one crowdfunding type
In terms of investment in companies, crowdfunding can be an interesting solution, particularly for projects:
- not requiring a significant amount of additional share capital (need limited to a few thousand or tens of thousands of Euros)
- which, despite their individual interests, do not have sufficiently innovative characteristics or sufficiently high potential for growth to interest business angels.
- where the project carrier does not want one (or more) co-investor(s) holding a significant percentage of the share capital in its company and wants (or is likely to want) to be involved in the management of the latter.
How does it work specifically?
- A crowdfunding platform, whether general or focused on a specific segment, is developed and made available to the public
- Project carriers meeting the platform’s characteristics and interested in this type of solution present their project and indicate their needs
- (optional) Platform managers analyse and sort the projects submitted
- The projects (selected) are presented to the public via the platform
- Potential investors who are interested in a project finance it at the desired level considering the terms related to the platform and the project selected.
At present, about twenty platforms are active in Belgium. They have different operating modes and objectives. It is therefore important to make the right choice, depending on the type of financing sought and your sector.