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Crowdfunding - Essay Example

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This paper presents crowdfunding which is a method of generating capital through the collective efforts of customers, family members, friends, and investors. The different approaches of crowdfunding include donation, reward, and equity-based…
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Crowdfunding
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Description
Crowdfunding is a method of generating capital through the collective efforts of customers, family members, friends, and investors (Belleflamme, Lambert & Schwienbacher, 2014). The strategy utilizes a large pool of individuals via social media, as well as, crowdfunding platforms to leverage their networks for purposes of connection and exposure. The different approaches of crowdfunding include donation, reward, and equity-based. Donation-based does not have a financial return to the contributors. The common donation initiatives include fundraising for nonprofits, charities, disaster relief, and medical bills. Reward-based entails contributors raising money for business in exchange for rewards (Freedman & Nutting, 2015). Typically, the reward can be service or product that the company offers. Just like the donation approach, the method does not have equity or financial return. The advantage of the method is that it lets capital seekers to incentivize their investors without selling ownership stake or incurring extra expenses. Equity-based offers the investors the opportunity to have a stake in the business. In this respect, the investors have a chance to trade capital for equity shares. The implication is that the contributors get a financial return on the investment, as well as, dividends.
Advantages to Producer
Crowdfunding presents numerous advantages to the movie producer. First, the strategy facilitates access to many accredited investors in which the entrepreneur can interact and share the fundraising campaign. The borrower can review the potential investors and select the best out of a large pool (Belleflamme, Lambert & Schwienbacher, 2014). Second, crowdfunding has flexible and many marketing options. The producer can promote the campaign through the email newsletter, social media, and other online marketing platforms. The media platforms mentioned above make the campaign viewable to the thousands of potential investors. Third, crowdfunding offers the opportunity to present an individual’s brand. In effect, creating the crowdfunding campaign will enable the producer to line out the financials and documentation for the investor. Lastly, the method is efficient, and one can centralize and streamline the funding drive. Building comprehensive profile facilitates funneling of the prospects and potential investors, and thus eliminating the necessity to pursue each investor individually (Freedman & Nutting, 2015). With crowdfunding, one can present all documents in the most accessible manner.
Advantages and Disadvantages to Potential Funder
Crowdfunding offers the potential funders an opportunity to be part of the company, especially in the equity-based approach. With the equity - based approach, the funder can trade in shares. The implication is that the funder gets financial investment and dividends. In addition, the crowdfunding provides the funder with diversification tool at a time when volatility characterizes the financial markets. Despite the notable advantages, the crowdfunding has potential drawbacks for funders. Investment risk and asymmetric information are some of the key limitations of crowdfunding. The funder can encounter investment risk in which the companies they invest in fail in the first year (Freedman & Nutting, 2015). Therefore, the risk averse investors find the crowdfunding a venture not worth to take part. Information asymmetry is also a disadvantage of crowdfunding. The entrepreneurs might be reluctant to disclose the confidential information to impersonal parties in the crowd (Belleflamme, Lambert & Schwienbacher, 2014). The limited information might mislead the potential funder.
Recommendations
The equity-based approach is the most suitable to raise the capital within the shortest time possible. Many investors are interested in purchasing equity in the privately owned or startup. With the equity-based approach, it is possible to attract sophisticated investors who have an interest in a specific market niche. Such investors could prove more valuable than the capital they offer to the crowdfunding campaign. Pursuing the reward-based approach might drain the resources due to the reward the investors expect from the company. Therefore, the equity-based approach can generate the needed capital, and boost the movie venture.
References
Freedman, D. M., & Nutting, M. R. (2015). Equity crowdfunding for investors: A guide to risks, returns, regulations, funding portals, due diligence, and deal terms. New Jersey: John Wiley & Sons.
Belleflamme, P., Lambert, T., & Schwienbacher, A. (2014). Crowdfunding: Tapping the right crowd. Journal of Business Venturing 29 (5), 585-609. Read More
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