Francisco Murguía: Capital Catalyst; Crowdfunding in Business
October 23th, 2023
As a lawyer and accountant, I have gained a strong understanding of organizations' administrative and financial requirements at every stage of their growth. My experience as a multi-sector entrepreneur has allowed me to utilize this knowledge to pursue diverse business ventures that may not appear to be connected initially.
Although business models can be extremely different from one niche to another, certain essential tools form the foundation for ensuring prosperous and stable development. Without the need for an exhaustive analysis, most of us can agree that liquidity and financing are among the most powerful tools when it comes to developing a business project. The amount we have at our disposal will define the possibilities and scale of the project we are developing. Of course, social skills also play a fundamental role, but let's be clear: more capital means more opportunities.
A few weeks ago, I posted a survey on my personal LinkedIn account, asking my friends and colleagues in the network which financing method was of most interest to them. Probably influenced by the recent Frutos Guadalajara campaign, 56% of you answered crowdfunding. So, I'll take this opportunity to share a bit about this financing possibility in the hope that it serves as inspiration for more than one.
First, what is crowdfunding?
Crowdfunding may seem like a new idea in banking, but its roots date back to the 1700s. It was formalized in its current form in the early 2000s. Crowdfunding literally means financing by the masses, and its refinement lies in ensuring it is a safe and effective option for all participants. The word was first used on the Internet on August 12, 2006. American writer Michael Sullivan needed a concise way to describe people's collective donations, so he chose the most precise description he could think of, officially solidifying the concept.
The first digital crowdfunding campaign took place in 1997 in the UK: fans of the British rock band Marillion raised $60,000 through an online campaign to fund the band's tour in the United States. Following the success of this funding method for the trip, the first crowdfunding platform, ArtistShare, was founded in 2000. Subsequently, more and more crowdfunding platforms were created, giving rise to the online crowdfunding market. With the increasing security technology applied to online platforms and the strength of social networks, the online crowdfunding market in 2021 reached an estimated value of $13.5 billion.
This financing method's popularity peaked in 2012 when President Obama enacted the Jumpstart Our Business Startups (JOBS) program. This law made it possible for individuals to invest in startups and for companies to use crowdfunding to issue securities, something that was not allowed before. This law also allowed non-accredited investors to invest in real estate, making 2012 the official origin of real estate crowdfunding, leading to over $34 billion being raised worldwide by 2015.
What can be financed with crowdfunding and how does the financing process work?
There are different types of crowdfunding platforms, such as donation, reward, investment, loans, or invoice trading; we will delve deeper into each type later on. Any business project that can demonstrate profitability and scalability can be financed in the case of investment, loans, or invoice trading. While each platform has its internal processes for selecting financing candidates, the approach after acceptance is usually as follows:
1. Initiation: The project is uploaded to the crowdfunding platform's website for the public to identify it, learn about its details, the financing needs to be covered, as well as timelines, return rates, and rewards.
2. Publication: The project is published for a set period, which can be 60, 90, or 120 days depending on the crowdfunding platform's criteria. This publication is accompanied by a massive digital marketing strategy.
3. End of Term: On the last day of the assigned term, it is verified whether the required amount of money was achieved or not. If the goal was met, investors start receiving their rewards; otherwise, the funds can be returned to investors or the possibility of reactivating the campaign can be considered.
In summary, crowdfunding is a virtual financing process where the general public is invited to invest in projects, with the reward being a percentage of profits, interest rates, ownership stake in the companies or their products. Whether a crowdfunding platform decides to support a project depends on its nature and the certainty and security it offers potential investors.