Crowdfunding (1): The Birth of the Idea

14.03.2018   |  Startup

The rapid adoption of the digital technology has changed the way we interact. Although according to some specialists the effects are not entirely positive – massive layouts further to upgrading production processes, the lack of human interaction – digitalization has improved productivity, communication, has simplified processes and managed to reduce bureaucracy.

This background is favorable to the development of startups or small and medium size businesses, including with regard to obtaining financing, although, according to surveys, 96% of entrepreneurs go bankrupt within the first two years as a result of scarce funding. In this respect, one of the most intrinsically technological ways of financing a business is the so called crowdfunding that is small amounts obtained from a big number of investors, as it is almost unconceivable in the absence of an online platform.

Evolution of the Financing Methods

To understand how we have got to crowdfunding, we should go through the various types of financing accessible to startups.

  1. By the year 2000, the newly launched businesses obtained financial resources from banks or investment funds, if they had employees, proved to be profitable or offered collateral to secure the loans.
    Getting a loan or attracting investments involved, as same as in any other type of financing, the existence of a well-structured business plan, which guaranteed the multiplication of the initial investment or the return of the loan.
    Any financial institution would analyze the file and try to assess how well the business worked, in order to make sure that, besides covering operational costs, all shareholders should make a profit.
  2. After the year 2000, the innovative startups in the field of technology have changed not only the way we communicate, work or live, but also the conditions for obtaining financing. It is in this period that more and more Business Angels have come up to encourage the launching and development of startups, choosing to believe in the potential of a business against the background of the digital technology development. Business Angels or Angel Investors allocate smaller financing as compared to investment funds, but the financial support is obtained in simple contract terms (they choose not to interfere with the operational management), irrespective of the financial results or number of employees.
  3. Currently an innovative idea may be supported financially by each of us by means of crowdfunding.

Specifically, crowdfunding, as a method or raising funds online, by means of communities, came out in 1997 and has gained scope after 2009. Currently, this financing form for an innovative product gets new dimensions, thanks to the existence of cryptocurrencies.

A Very Brief History of Crowdfunding

  • In 1997, a British rock band financed their concert by raising funds from fans. 
  • In 2000, ArtistShare platform was launched on the market and, shortly after, the concept has started to attract the public attention.
  • Crowdfunding has gone full-fledged and tripled its financing the financing from 2009 to 2011, from $ 530 million to $ 1.5 billion.
  • In 2011, President Obama approved a law called JOBS (or the crowdfunding law), which allowed the entrepreneurs to disclose to the public that they were raising money.
  • Fundable has been the first business platform, launched by Will Schroter, after the adoption of the JOBS law, meant to help the entrepreneurs raise funds. 
  • In 2013, Mastercoin was the first cryptocurrency financed by crowdfunding (ICO – Initial Coin Offering)
  • In 2017, 18 platforms promoted ICOs, such events becoming more and more popular.

I’ll continue the crowdfunding series with Platforms, pros and cons and tips. 

Octavian Pătrașcu  |   14.03.2018   |  Startup

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