Crowdfunding has really been making a name for itself in the past couple of years, with websites such as Kickstarter making the headlines as the trend picks up the pace. Indiegogo, Kickstarter and Quirky are just three examples of this new type of equity fund, which came into public consciousness in about 2006.
Parallels have been drawn between the idea of crowdfunding and private equity, with one obvious difference: scale. Private equity firms deal in the millions or billions of dollars, and whilst crowdfunding campaigns can raise significant funds, the difference in the type of investor is key.
Contributors to private equity are often institutional investors, such as banks and pension funds, who invest large quantities of money in singular transactions. Crowdfunding targets the individuals, who invest small amounts, but on a large enough scale to create a cumulatively large pool of money. Often, private equity funds will not consider investors with firms with a value of less than $10 million, whereas crowdfunds can consider equity from 1 cent upwards.
However, there are also smaller scale differences that separate private equity and crowdfunding. These include the type of products targeted. For example, private equity firms often focus on particular industries and their products, such as the mining sector and raw mined materials, which will sell for a large sum if their producing companies are bought out and later sold.
Crowdfunding, however, can be instigated for a wide variety of products or services. Social projects, such as charitable endeavours, are only one of the many types of concepts that attract investment; rather than donating, investors put money into a particular project’s budget. Of course, this style of investment can extend to anything that can be monetised: a new novel, an album, a game, a housing project.
The dividends are also quite distinct. Private equity funds make money for clients, but crowdfunding often sets goalpost rewards for donating money to the project. For example, if the project is a new design for an eco-friendly water filtering system, a prototype might be sent to the investors. A band might release a song from their album to incentivise investors to donate more money. The result is not so much a monetary gain, but a societal one.
After consideration, crowdfunding can be described as just a novel way of generating private equity; however, the methods utilised and the resulting dividends are entirely different. It focuses on the individual, making it more appealing for the general layman, but its business model is something the financial industry might just consider adopting.
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