Crowdfunding is one of the methods to raise capital for a project or venture from a large number of people who each contribute a relatively small amount, typically via the internet. This approach taps into the collective efforts of a large pool of individuals, primarily online via social media and crowdfunding platforms and leverages their networks for greater reach and exposure.
Statistics prove that the global crowdfunding market size was $84 billion as of 2018 and is expected to reach $114 billion by 2021. There are more than 600 crowdfunding platforms globally that raise over billions of dollars annually.
Crowdfunding is essentially the opposite of the mainstream approach to business finance. Traditionally, if you want to raise capital to start a business or launch a new product, you would need to pack up your business plan, market research, and prototypes and present it to your potential sources of finances. These funding sources included banks, angel investors, and venture capital firms, often limiting your options to a few key players. Summarized below is the major difference between crowdfunding platforms vs. other funding sources.
Crowdfunding platforms, on the other hand, turns that funnel on-end. By the entrepreneur, a single platform to build, showcase, and share your pitch resources, this approach leaves some sort of freedom in the hand of the entrepreneur with what they wish to share on the platform about their venture.
This platform has been used to fund a wide range of for-profit, entrepreneurial ventures such as artistic and creative projects, medical expenses, travel, and community-oriented social entrepreneurship projects
Just like there are many different kinds of capital round raises for businesses in all stages of growth, there are a variety of crowdfunding types. Whichever method you select depends on the type of product or service you offer and your goals and objectives for growth.
Opening doors to a wider pool of investors, flexible financing options, there are multiple reason why crowdfunding is considered to be and optimal method of financing. It reaps many benefits for a startup as mentioned below:
40% of crowdfunding investments are focused on business and entrepreneurship, while 20% focus on social causes. Crowdfunding platforms bring people together; they make use of a network of a vast number of people to with certain interests and enable them to contribute to a cause or project that they believe in. It has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional sources of owners, relatives and venture capitalists.
These platforms have created an opportunity for entrepreneurs and startups to raise capital from anyone with money to invest in nothing more than an idea. These platforms provide a forum to anyone with an idea to pitch it in front of waiting investors and open the doors for many more opportunities. Investors (strangers essentially) can visit these websites and go through hundreds of projects to invest in the ones that they like. There is no minimum amount to the amount that you can invest and more often than not, all contributions are rewarded based on the amount that you spend. A few popular crowdfunding platforms are listed below:
Here is a quick video to help you summarise and grasp the concept of crowdfunding for further clarity.
There's two perspectives towards who uses these platforms: entrepreneurs looking for investors for their business and those individuals with ample amount looking for businesses to invest in. For those needing finance crowdfunding platforms provides an opportunity for them to reach a wide audience with their message and their request. It allows them the chance to engage with new finance sources they would otherwise never have known about. The process is centralised and efficient making it easier to raise large sums.
Crowdfunding websites generate revenue from a percentage of funds raised. The way these platforms operate is through making money by taking a percentage of the money that is raised during the course of a project. For example, you'll also have to pay a credit card processing fee that is upwards of 3% of each transaction. This number usually ranges from between 3% and 10%, but it can go as high as 30%. This is usually a mutually beneficial arrangement for both the platform and the business owner; you only pay if your campaign is successful.
Transaction rates will differ depending on the platform that the entrepreneur chooses to take. For example:
Crowdfunding sites provide premium services for an extra fee. This may include access to consulting services, due diligence materials, video creation software, or featured placement on the site. This “freemium” model is becoming very common in the tech industry, and it looks like it is becoming popular with crowdfunding too. There is a big market for crowdfunding support services beginning to emerge, which gives crowdfunding sites extra ways to partner and make money.
In 2015, Malaysia became the first ASEAN country to have a legal framework on crowdfunding. Deputy Finance Minister Datuk Ahmad Maslan said that "six local companies registered with the Securities Commission have been approved to carry out crowdfunding activities". The Bill, which was passed after two rounds of debates by Senators will protect the interest of crowdfunding investors and companies.
Under the Bill, private companies with a paid-up capital of not more than RM5 million and with a strong business plan can now fund their ventures through crowdfunding. The amount of capital collected through crowdfunding is limited to RM5 million, while small and medium enterprises can crowdfund an amount of up to RM3 million in a year.
For investors, the maximum investment amount is limited to RM5,000 for each company and RM50,000 a year for the total amount of crowdfunding investment. Any fraud committed in crowdfunding activities would fall under Section 179 of the Capital Markets and Services Act which carries a jail term of not more than 10 years and a minimum fine of RM1 million.
Ever since the approval of this Bill in 2015, below are the statistics and growth of Malaysian crowdfunding industry.
In Malaysia, there are lots of crowdfunding platforms you may choose from. Read all about them below and see which one fits your fundraising needs.
On a final note, at an initial stage, an investor might not be interested in your ideas, but with crowdfunding, you can be sure that small amounts from individuals will take you closer to building your dream business. Crowdfunding is not just about raising capital but campaigns become great marketing tool as you get the opportunity to reach out to the masses and let them know what you are working on. This is a marketing strategy that works in most of the cases, and you get the unexpected support of the masses, who may not invest in your project but will tell others about the same.
When compared to traditional applications, you can be sure that the process is a lot easier and quicker. Compare it to the loan process or the resources involved in getting other capital investments, and you’ll know that there is a huge difference between them. Crowdfunding is easier also because you don’t have to invest your money in it. This way, you can start right away, with just the right idea in your mind and the skills to execute the processes whenever needed.