UNDP: Financing Solutions for Sustainable Development

What is Crowdfunding?

This is an excellent guide from the UNDP

Innovative approach for projects, organizations, entrepreneurs, and startups to raise money for their causes from multiple individual donors or investors. Four models of crowdfunding exist: donations; reward; lending; and equity.

How does it work?

Crowdfunding is a collective effort of individuals who pool  their resources to support initiatives promoted by other people or organizations. Using social networks and the viral nature of online communication, individuals and companies have raised billions of dollars in debt, equity, and donations over the past decade. Crowdfunding emerged from innovation in technologies that made it possible for businesses, NGOs and individuals to secure funding with no or limited intermediation. The market has grown in developed countries, partially as a response to the credit crunch resulting from the 2008 financial crisis. Thanks to a rapid and unprecedented expansion of Internet and mobile access, it soon expanded to developing countries.

Crowdfunding has grown rapidly from a Silicon Valley social experiment to a multi-billion dollar industry– from US$1 billion in 2011 to US$34 billion in 2015. It also expanded from financing charities into enterprise financing and quickly overtook angel investing to become one of the largest sources of financing for SMEs, second only to venture capital. The industry is expected to reach an annual volume of US$100 billion by 2025 and becoming the leading financial channel for SMEs. Crowdfunding in developing countries raised US$430 million in 2015, with India, the Philippines, and Nepal in the top three.

Four different models of crowdfunding have emerged:

  1. Donations-based: The crowdfunder donates funds without expecting any return. Donations are typically used to support disaster relief, famine, education programmes, etc. JustGiving and GoFundMe are among the largest donations-based platforms. Globally, over US$2.85 billion in donations were raised in 2015.
  2. Rewards-based: The crowdfunder transfers funds with the expectation of a reward, which may be in the form of a token gift or an early/exclusive release of a product or service offered by the startup company. Kickstarter and Indiegogo are among the most successful crowdfunding platforms built on rewards-based model of crowdfunding. Since its launch in 2009 through April 2017, more than 123,000 projects have been funded through Kickstarter with nearly US$3 billion pledged. All-or-nothing (AON) campaigns require a project to hit 100 percent of its funding target. If the target is not achieved, funds are returned. Keep it all or flexible funding (KIA) campaigns instead allow the project sponsor to keep the amounts raised. AON campaigns have more backers and raise a higher amount of funds compared with KIAs: an assessment of the campaigns run in the years 2011–2013 via Indiegogo found that AON projects’ average funding goal was US$31,397 compared with US$20,478 for KIAs; 34 percent of AON campaigns reached their goal, compared with 17 percent of KIAs .
  3. Lending-based or Peer-to-Peer (P2P): the fastest growing type of crowdfunding has a 73 percent market share. The crowdfunder lends money to individuals or companies in return for interest. While there are platforms exclusively targeting socially-oriented lending, the majority operate as commercial platforms in direct competition with other financial intermediaries. KIVA is providing small loans (from US$100-US$100,000) to farmers, NGOs and SMEs that make positive impact  and has already provided more than US$1 billion in small loans.
  4. Equity-based crowdfunding: The crowdfunder purchases equity in a company. Equity is a new, yet rapidly growing, model in crowdfunding with over US$2.5 billion invested in 2015. Equity-based crowdfunding could reach up to US$36 billion by 2020 and eventually surpass venture capital by value (Massolution). Equity-based crowdfunding remains highly dependent upon supportive regulatory frameworks, which often restrict equity investment to professional investors.

A successful crowdfunding campaign may draw on a platform with a wide audience, such as KickstarterIndiegogoKiva, or GoFundMe. New platforms may also be established under certain circumstances. There are numerous resources on crowdfunding, including blogs, books, networks, and training, including guides on running campaigns from IndiegogoFundableKickstarterCrowdfunding Guides, and Shopify.

StakeholdersCrowdfunder: The crowdfunder can be a backer, donor, or investor. Individuals make the most of the market, but private and public institutions can invest and/or donate as well.Beneficiary-investee: Any person or organization seeking funds for a company, product, project, or initiative. There is a vast range of actors from small companies, NGOs, individuals, start-ups, etc.Crowdfunding platforms: Online platforms connecting the crowdfunders with the beneficiary or investee. They charge commissions for participation and/or on interest/dividends. Platforms can provide a wide range of services, including financial due diligence, contracting, etc.Third party verifier and other service providers: Platforms and beneficiaries/investees can rely on a number of service providers. Platforms may need to buy services—e.g. financial due diligence—or outsource the assessment of social and environmental outcomes.Sponsors: Beneficiaries may obtain support in designing and running crowdfunding campaigns. These services can be offered pro-bono or on a commercial basis.

Potential in monetary terms (revenues, realignment or cost-savings)

Crowdfunding has grown substantially, from US$1 billion in 2011 to US$34 billion in 2015 (Massolution). P2P lending (US$25 billion), donation (US$2.9), rewards (US$2.7 billion) and equity crowdfunding (US$2.5 billion) make up most of the market. These amounts are already comparable  with venture capital, which is investing an average of US$30 billion each year. The market may surpass the US$100 billion threshold before the World Bank’s 2025 estimate. Donation and reward crowdfunding have historically taken the largest share of the market and were only recently surpassed by P2P lending. Equity-based and lending-based crowdfunding platforms are expanding at the most rapid rate, in the UK at nearly 300 percent in 2015 (NESTA). The shares of the different crowdfunding models are different between developing and developed countries: in 2015 43 percent of crowdfunding in developing countries was classified as donation, 38 percent as lending, 11 percent as equity, and 7 percent as reward (Allied Crowds).

Crowdfunders invest mostly in business and entrepreneurship (40 percent), social causes (20 percent), films and performing arts (12 percent), and real estate (6 percent). In addition to the above, specialized platforms have also emerged, targeting subsectors like agriculture, retail, food, and housing and services (UNEP). Environmental projects are at the periphery; while platforms like Indiegogo and Kiva have started to enlist green projects, they remain a minority. An exception is renewable energy with an estimated €200 million in crowdfunding transactions that is facilitated by 25 specialized platforms.

The different crowdfunding models and platforms’ own strategies have produced a broad range of results in the amount of resources mobilized. Kiva, which serves small entrepreneurs through a network of microfinance organizations, has facilitated the disbursement of 1,6 million loans to the tune of US$1 billion as of October 2017.  Of the Kiva borrowers, 749,149 have come from least developed countries, 81 percent being women. Kickstarter has allocated over US$815 million from 4.9 million backers to nearly 50,000 projects. To date, the most successful project was the video game “Star Citizen”, which collected more than US$145 million. In Nepal, where a devastating earthquake killed over 8,500 and affected 5.6 million people in 2015, US$23 million was raised from individuals sending money to their families, diaspora groups supporting their communities, and other international donors, much of it through crowdfunding.

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