If crowdfunding is your go-to investment type you should know that long before the Internet was even a dream, crowdfunding was finding its roots in a variety of different mediums under the guise of different names.
From the early renaissance patrons who supported the works of Leonardo Da Vinci, Michelangelo, and Galileo Galilei to the later crowdfunding of the concrete platform on which the Statue of Liberty was built on, there are many examples of artists, musicians, authors, businesses, and governments turning to the general populace to help raise the funds needed to pursue a project.
With the coming of the Information Age, crowdfunding as we know it was given a huge boost as it became easier than ever to reach much larger (and often more specialized) crowds of potential supporters.
The Rise of Internet-based Crowdfunding
Modern day crowdfunding has moved primarily into the realm of the Internet, and because of this, a variety of websites have been able to crowdfund money from all over the world. The two most popular websites are Kickstarter and Indiegogo, which have raised over 3 billion dollars for projects combined.
Although these two sites hold fundamentally different founding principles, they both perpetuate the five key benefits found in crowdfunding, according to fundable.com: Reach, Presentation, PR/Marketing, Validation of Concept, and Efficiency. These five benefits are what makes crowdfunding so popular, as it presents a way to raise funds and reach a larger amount of people, showcase your product, create buzz, and secure early customers who want to use your product in a very efficient manner through a single medium.
There is no other way to raise funds for a project that encapsulates all of those concepts into one, and the type of funding that can be raised can be divided into four different categories: donation, equity, marketplace lending, and reward-based.
- Donation-based campaigns are designed for nonprofits and are, just as the name suggests, strictly donation-based. There are no rewards for donating to these campaigns, only the feeling of supporting a charity that you believe in.
- Equity-based crowdfunding is the concept of selling a part of your business to secure funding. This relates to the older style of venture capitalist funding, and this can lead to larger amounts of money raised.
- Marketplace lending is the process of raising money for your business that you intend to pay back, without having to go through formal financial paths such as banks or other lending institutions. Marketplace lending often has more favorable rates than traditional banks.
- Reward-based crowdfunding is the type of fundraising used on Kickstarter and Indiegogo, and functions by offering donors a reward such as an early product release. This type of crowdfunding secures early customers because the people donating to your campaign are interested in purchasing your product.
Regardless of the type of crowdfunding, there is still a collection of shared problems that all of these funding methods share. When funding a project, there is no guarantee that the money will be spent as intended. Receiving the money in one lump sum often jars a newly-founded company who aren’t proficient in maintaining its own budget yet, making it more difficult in the future for them to maintain their expenses when they are dependent on sales to fuel their budget.
This can lead to some crowdfunded startups failing because, although they are provided with the funds necessary to succeed, they lack the business expertise and guidance of an educated veteran of the field, a problem that can be easily remedied with blockchain crowdfunding platforms.
Blockchain’s Potential to Change Crowdfunding
Creating crowdfunding mediums using blockchain technology offers a plethora of solutions to many common problems, from accessibility to transparency, and even expenses. With the inception of blockchain technology and its inclusion into the crowdfunding sphere, many unique types of fundraising have spawned as a result, the biggest of which being Initial Coin Offerings.
[bctt tweet=”The trend is so popular that even @Indiegogo, a market leader in crowdfunding, has become involved in ICOs”]
ICOs are a way for blockchain-based companies to raise money by offering tokens at a heavily discounted rate, and purchasers of these tokens expect the value to increase after the company becomes more popular. The trend is so popular that even Indiegogo, a market leader in crowdfunding, has become involved in ICOs and equity funding in partnership with MicroVentures. The reasons that a company as successful as Indiegogo would want to get involved with ICOs can be broken into three main categories that we will explore: accessibility, transparency, and cost.
1. More Accessible
When crowdfunding moved from the real world to the digital one it opened the fundraising door to a much larger crowd, both those wishing to seek funds as well as those wishing to provide. However, traditional online crowdfunding still suffers from roadblocks and fees associated with international borders and barriers of entry for casual investors seeking early entry at the ground floor.
Using the blockchain gives the public access to startups that used to only be available to venture capitalists. Although there are crowdfunding opportunities not on the blockchain that allow access to equity, the minimum funding amounts are typically too high for the average consumer to afford.
“An estimated $331 million has flowed into ICOs in the past year: a third of a billion dollars, eclipsing the $140 million VC investment in blockchain startups. And the trend is only accelerating. Eight-figure raises are no longer rare, and it has become the de facto way for blockchain organisations to fund their initiatives.” – Kayrat Kaliyev, economist.
Shorter lock time
When venture capitalists invest in ICO’s it doesn’t tie their money up for a very long period of time the same way that many early-stage startup equity investments do. Sometimes investments can see a return in as short as nine months; this allows for VCs to invest in more startups over time.
“Traditionally, venture investors can work with a startup for as long as 10 years waiting for an IPO or acquisition of the company to give them a return on their investment. But with ICOs, a venture investor who buys coins ahead of their public sale can usually expect the ICO to happen in as little as nine months, and from there on the VC can cash out, though some ICOs don’t allow such sales for three to six months after the offering.” – Tomio Geron, editor at WSJ
Investing can take place from all over the world, since ICO’s accept one type of cryptocurrency or another, and the funding can be sent across borders without heavy fees or legal restrictions.
In this Nasdaq article, Prableen Bajpai talks about how “[o]ver the last few decades, there has been a steady rise in global businesses and international trade along with diaspora contributing to an increase in intricate cross-border payments. Cross-border payments account for about 40% of global payments transactional revenues with payment flows of more than $135 trillion during 2016 (as per McKinsey).”
However, the current protocol suffers certain shortcomings, such as non-fixation of exchange rate until arrival of funds.”
ICO’s provide a company with a way to raise finances without having to go through the seemingly endless rounds of financing that are traditional when dealing with angel investors or venture capitalists. Also, so long as the company isn’t offering equity during their ICO it reduces the legal requirements and loopholes they have to jump through, which can reduce the time from launch-to-funded by years.
Take for example Brave, a web browser founded by Brendan Eich (co-founder of Mozilla) that raised $35 million from its ICO in less than 30 seconds.
2. More Transparent
Without the use of a third-party mediator, there is no guarantee that the money given to a crowdfunded campaign through traditional methods will be used as intended. There are many cases of crowdfunding gone wrong because the businesses were not transparent enough. They raised funds and spent them on unknown things, or never had a proof of concept to begin with. Where traditional online crowdfunding falls short in transparency, blockchain-based crowdfunding can thrive.
Guaranteed through smart contracts
Blockchain software provides a platform to record and verify transactions, as well as other information, from a variety of different parties without the expense of brokers or other mediators. Smart contracts provide the trust that is lacking in many crowdfunding opportunities, providing guarantees for potential investors without relying on an intermediate company to enforce promises. Certain milestones can be set, and unless the community agrees that the project has progressed far enough to meet these milestones, the funded money will not be released to the startup; this can be automated using smart contracts.This can guarantee accountability to ensure that invested money is being spent wisely and correctly.
In the nonprofit sector, smart contracts are being used to “ensure that funds set aside for cleanup, such as those from Shell, are paid on verification of project completion, rather than contractors just withdrawing funds.” (Marian Conway, the executive director of the NY Community Bank Foundation)
In traditional crowdfunding, there is a lack of a corporate governance mechanism in place. This oftentimes leaves the entrepreneur to make all of the important business decisions. In blockchain crowdfunding, however, smart contacts can be implemented to provide a medium for investors to vote on the decisions that they think the startup should make, allowing their investment amount to carry the weight of their vote. These votes would be recorded in the blockchain and could be enforced automatically through smart contracts.
In his article “Blockchain and Corporate Governance,” David Yermack states, “The greater speed, transparency, and accuracy of blockchain voting could motivate shareholders to participate more directly in corporate governance and demand votes on more topics and with greater frequency.”
Companies can raise money without giving up decision-making power to venture capitalists. They also won’t be forced to surrender any equity unless they choose to during their initial coin offering.
“Entrepreneurs seeking capital to build tech startups have long sought out elite venture capitalists on the famed Sand Hill Road in Silicon Valley. Now the many startups developing applications for blockchain technology have another option: They can go online and raise millions by creating digital tokens, for use as currency on blockchain platforms, and selling them in what is known as an initial coin offering, or ICO.” – Tomio Geron, editor at WSJ
3. Less Expensive
Whether investing at the ground floor through an ICO for a fraction of the cost the coin might later be worth or simply trying to support a company in a different country, the blockchain provides the medium for lower fees and entry costs in the crowdfunding world.
A blockchain based crowdfunding company would provide a decentralized network for both the potential startups and the funders when it comes to the funding model, removing the influence of any specific company and eliminating large fees that are common through current crowdfunding providers.
Blockchain crowdfunding provides the opportunity for potential investors to make more money after buying the initial coins if the popularity of the company increases.
[bctt tweet=”Whether the investors plan to sell or hold, they have more flexibility in an ICO over traditional equity”]
NXT, founded in 2013, set a price of $0.0000168 per coin during their ICO. The price of NXT at the time of writing this article was $0.196, meaning early investors who sold today would benefit from an increase of over 1,166,000 percent. Buyers can also use these coins to buy future services from the company they invested in. This could possibly entice investors to purchase coins during the ICO if they are interested in the future services that the startup will be offering. Whether the investors plan to sell or hold, they have more flexibility in an ICO over traditional equity.
Ever since Kickstarter and Indiegogo became household names, it would seem almost ludicrous to try to raise money for a crowdfunding campaign outside of an established platform. Going door to door asking your neighbors for money to renovate your garage would be met with strange looks, but inviting them all to a Kickstarter page filled with videos, statistics, and a vision could be met with much greater success. So why are we still treating ICOs like door-to-door solicitation?
Investing in ICOs can be risky, as many of them do fail, but a majority of the risk comes from the fact that they are being offered with no guarantees. In the current Wild West of ICOs with proven ponzi schemes like BitConnect, there is a need for a platform to vet scammers while keeping the decentralized nature of the blockchain in the forefront of operations. Investors want to know that their money isn’t going to disappear during an elaborate exit scheme, and they also want to be more involved in the ICO from the ground up.
CrowdCoinage aims to be a “decentralized crowdfunding platform for ICO Campaigns. CrowdCoinage’s goal is to provide a complete solution to start and fund a business from anywhere in the world in a decentralized environment for free.”
Looking over CrowdCoinage’s Whitepaper gives us an idea of the current and future plans they have to stand out from the crowd:
- Crowdfunding ICO campaigns – A platform for startups to launch ICO campaigns with community support.
- Crowdfunding ICO campaigns for traditional businesses – Established businesses can raise additional funds through an ICO by using existing community tokens instead of launching their own.
- Community – Positions can be posted and applied for in the job market, questions can be asked in the forums, and messages can be exchanged publicly and privately. Advice can be given freely or paid for through the CrowdCoinage currency.
- Marketplace – All types of services that are crucial for a startup can be found in the marketplace, from market analysis to developmental tools, and everything between.
- P2P Loans – API fueled information will shorten approval time for P2P loans, and given the nature of decentralized blockchain technology, lending worldwide will be simple.
- Exchange and Wallet – Onboard exchange and wallet make it easy to store the tokens purchased in ICOs and exchange them for more widely traded cryptocurrencies.
- E-Residency Integration – Found a company fully online from anywhere in the world with access to business banking and online payment services, such as PayPal.
When a startup hosts its ICO through CrowdCoinage, the project will be submitted to the community to earn its trust and approval. The project must be built around a group of supporters who cast positive votes before it can move onto the next stage, the token sale. Given that the project will have already been received in a positive light at this stage, the token sale is more likely to succeed. The project must have a roadmap, and upon receiving enough funds to reach the first milestone, the rest will be held by a smart contract until the investment community agrees that the project’s team has fulfilled the promises and requirements of subsequent milestones. This will help prevent exit scheme strategies since the project will constantly have to be verified by the community and its investors.
Imagine that HowToToken (we’ll call it HTT for short) is launching an ICO on CrowdCoinage, and you’re thinking about investing. Before HTT could begin trying to raise funds through the CrowdCoinage platform, it would first have to garner support and interest through votes cast by community members (people who hold CCOS, the CrowdCoinage coin). After HTT has received enough positive votes, it can hold its Initial Coin Offering, and is more likely to succeed because it has already demonstrated that the community has interest in it. If HTT is successful in raising funds, and you invested into it, you will notice that only the first milestone’s worth of money is released to HTT. As time passes and the HTT team demonstrates that they are making progress, anyone who invested in the company can cast their vote to release the next milestone, and so on.
CrowdCoinage also plans to incorporate a collection of different aspects of the ICO field into its platform, included in its Marketplace that is meant for both companies and professionals to offer their services. Many ICOs fail because of the lack of expertise and experience. But through the CrowdCoinage job market, startups can find the right talent from copywriters to community managers, legal counselors, marketing specialists, programmers, and everything in between, to fill the positions to help them succeed. All of these professionals will be vetted in the community and their past experience in the Marketplace will be recorded immutably on a blockchain.
With such lofty goals, it is no surprise that CrowdCoinage is the first platform that intends to envelop the entire ICO market and all that it entails. There are other ICO hosting platforms, but each of them serves a more specific purpose. Coinlist.co is a very exclusive platform and has only accepted three ICOs, raising over $850 million dollars since its launch. Kickico.com utilizes their KICK currency to fuel their ‘KICKONOMY,’ and investors who hold onto their currency earn a monthly dividend bonus. A third option is icoengine.net, which is backed by Eidoo that boasts a heavy user base of over 5,000,000 unique monthly visitors.
Crowdfunding has come a long way from royal patrons pledging gold to aspiring artists, but the premise behind funding hasn’t changed during its long history: securing funds through large amounts of small incremental payments. Just as the invention of the Internet changed the shape of crowdfunding, so will blockchain technology alter the way we look at the industry, making it more secure, transparent, and less expensive.
[bctt tweet=”Blockchain technology is making crowdfunding more secure, transparent, and less expensive”]
This does not mean the way startups and ideas are funded will instantly change; venture capitalists and angel investors will find work for many years to come, but as the market starts to shift, more and more companies may turn to ICOs to get their ideas off the ground. But just like the Wild West, the days of unregulated and potentially dangerous ICOs will come to an end as platforms become more popular.
While there are a variety of platforms to choose from, there are currently no platforms similar to Kickstarter or Indiegogo that have cornered the market and gathered a majority of users. With CrowdCoinage combining all of the essential components of the ICO market, we may be witnessing the birth of an industry giant.