The term crowdfunding actually encompasses three different types of participatory financing: donation (crowdsupporting), lending (crowdlending), and investment (crowdinvesting). Within these, there are many subcategories of fundraising depending on the nature of the project, the status of the beneficiary, or that of the contributor.
Crowdfunding, also known as participatory financing, is a fundraising tool operated via an online platform. It allows collective, direct, and traceable financing of tangible projects. Generally, three main forms of crowdfunding are distinguished:
1. Donation (crowdsupporting)
With this form of financing, the investor forgoes repayment of the money entrusted and receives a symbolic or low-value material reward (e.g., a product or ticket related to the sponsored project). Donation without reward mainly concerns associative and cultural projects.
38% of projects on donation platforms are humanitarian; 21% relate to teaching and education, and 17% to culture. Donation with reward targets projects in audiovisual and cultural sectors (31% of projects), but also business projects (technology, commerce, and services). In this case, the reward can be likened to a pre-sale: in exchange for their contribution, the donor will receive the offered product or service (for example, the music CD of the funded artist, local products from the company, the connected watch developed by a startup, etc.). This type of financing offers strong advantages for project creators, such as validating their idea and financing without bank loans.
This type of financing is not only used by individuals and young companies. Well-established companies such as Peak Design, an American outdoor equipment manufacturer, regularly pre-finance products via crowdsupporting. 38% of investors are aware that idealism, not return, is the primary motivation in this type of financing.
2. Lending (crowdlending)
This form of financing is the (r)evolution of the current SME financing model. In an era of negative interest rates, it is difficult to find a profitable, reliable, and responsible investment. The apparent paradox is that SMEs face difficulties obtaining financing. While credit was once a banking monopoly, individuals can now lend to businesses.
There are two types of actors:
- Non-interest loan platforms (the contributor is repaid but does not receive interest on the loaned amounts), mainly for entrepreneurial or agricultural projects.
- Interest-bearing loan platforms, which are more aimed at SMEs. Interest-bearing loans offer high interest rates (between 4 and 10%) in exchange for the risk taken by the lender. Contributions allow the company to obtain credit within very short timeframes (sometimes in just a few days).
- In Switzerland, crowdlending is attracting growing interest from investors, entrepreneurs, and platform operators alike. Growth is mainly driven by crowdlending, whose financing doubled between 2013 and 2014. According to the "Swiss Crowdfunding Monitoring 2018", its volume today represents 186.7 million francs.
3. Investment (crowdinvesting)
Crowdinvesting is participatory financing in exchange for equity. A startup or company can raise capital funds on an investment platform.
In Switzerland, the market for financing already well-established companies is expanding rapidly, while financing for new business startups is slowing down. Indeed, early-stage venture capital investments in startups have halved in recent years.
Venture capital firms are increasingly reluctant to finance startups needing small amounts, especially since compared to larger investments in more established companies, these investments require as much, if not more, oversight, with a recovery period of at least 5-7 years and higher risk.
On the private investor side, high market volatility, declining returns, and the omnipresence of banks in transactions have somewhat distanced them from traditional finance. Managing significant wealth and savings, they wish to see new forms of financing and investment develop that meet their criteria.
It is in this context, and to connect supply and demand, that the crowdinvesting model is developing, offering investors equity participation, a share of profit flows, a financial product, real estate investment, or participation in a managed investment fund. Investors are rewarded by return on investment, similarly to traditional venture capital investment.
