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Guiding Trend 21 May May 2018 0835 21 May 2018

Crowdfunding: when and how to use it for businesses, startups and the Third Sector

With a total of over 41 million euros collected in 2017 and an increase of 45% compared to the previous year, crowdfunding is the instrument with the highest potential for startuppers, businesspeople and creative people. But how do you build a successful crowdfunding campaign?

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Once upon a time there were the three Fs that made new ideas take off: F for friends, family and fools to which artists and entrepreneurs turned to for support of their schemes. Today the network has multiplied to the nth degree the pool of people to ask for a contribution to finance your own project.

Thanks to the web the old "collection" has not only been dusted off and polished but has finally reached its full potential. In fact, with its transposition into the digital era, we can declare the inauguration of the Crowdfunding era , literally "financing by the crowd", an instrument that has been able to revolutionize the world of creative, social and business projects, gathering more than 34 billion dollars at the global level.

What is crowdfunding

Offer everyone the opportunity to launch their own fundraising campaign: this is the idea behind this system of financing which came into being at the end of the nineties in the area of independent rock. It was 1997 when the British band Marillion decided to ask their fans to finance the USA tour through the creation of an online campaign. An extremely successful experiment: the fans were enthralled and contributed donations that reached 60,000 dollars. The success was repeated by other artists and not only in the music industry: it was to the network that in 1999 the American director Mark Tapio Kines turned to finish his first feature film entitled Foreign Correspondent. The online campaign gathered over 125 thousand dollars, the figure necessary to sustain the costs of post-production.

Even if you had to wait until 2009 for the launch of Kickstarter, the most successful platform to which the transformation of crowdfunding into a mainstream instrument was largely due, the first platforms started to appear on the web from the early two thousands. Set up in 2003, Artistshare is the first web site dedicated to the financing of artistic projects. The model worked and has also been replicated in Italy with Produzioni dal Basso, the first fundraising platform shared in our country, set up in 2005, which was even ahead of its time because at that time the word did not exist. Produzioni dal Basso is the demonstration of how this formula can also operate in Italy; even today it is still one of the three most successful platforms in our country, collecting more than 5 million euros, of which 2 million only in the last year.

"We have also opened a customer service and you can even donate by bank transfer", explains Angelo Rindone, founder of the platform. All details that make the site simpler to use even for those not born in the digital era, in a country like Italy where economic transactions online are still viewed by many with suspicion. The growth of Produzioni dal Basso nevertheless testifies to how crowdfunding is becoming increasingly mainstream, even in a country where the digital gap is still an obstacle today.

Crowdfunding, lending and equity crowdfunding: Differences

The continuing growth of crowdfunding is also confirmed by the growing number of platforms: a veritable labyrinth of the web, populated by a very wide variety of types in which it is increasingly complicated to extricate yourself.

Here are the three fundamental models:

  • General crowdfunding

This is the purest and most widespread form of this tool. Two fundamental sub-types: Donation-based Crowdfunding and Reward-based crowdfunding. The first case enables you to launch a real online donation campaign, in which the supporter offers an economic contribution to a social impact project without expecting anything in return. Retedeldono is the donation-based platform most used in Italy, ideal for non-profit organisations and associations.

The mechanism of Reward-based, is instead different because the donations of the campaign are divided into economic brackets, from the minimum contribution, on average between 5 and 10 euros, to larger contributions consisting of several hundred euros, that can even reach a several thousand depending on the project and the objective. Depending on the size of the contribution made, the supporter in fact receives a "reward", which in the case of campaigns for movie projects for example can vary from a simple expression of thanks via Facebook, to receipt of a postcard autographed by the director, up to being included in the closing credits of the film as a “producer” for more substantial donations.
Kickstarter is reward based, as are the three most successful Italian sites: Eppela, Musicraiser, and Produzioni dal Basso. This model is widely used by artists, creative people and authors, but also designers and businesspeople who want to launch a ground-breaking idea.

  • Lending crowdfunding

This is a genuine form of loan shared online. A financial instrument that allows supporters to offer economic contributions in exchange for an interest or reimbursement of the capital. In many cases it is the platform itself that selects projects giving each one a rating.
Lending crowdfunding is much appreciated by small businesses and savers that help to finance business projects following your money transparently and reducing the risk which in this case is shared with other people. One of the most successful platforms in Italy is Borsadelcredito.it, with more than 30 million euros granted to Italian companies with an average return of 5% to the lenders.

  • Equity Crowdfunding

Equity CrowdFunding is the model with the fastest growth in our country. The system makes it possible to raise funds online, offering shares in the company to anyone who decides to finance the scheme. A genuine form of investment from below which was available before the beginning of this year only for startups and innovative companies and which from 3 January 2018 is also open to SMEs and social enterprises. With an increase of 150% in 2017 compared to the previous year, Equity crowdfunding, which is particularly suitable for companies with a high relational capital, has emerged as the model with the greatest potential for growth in 2018.

Crowdfunding in Italy

"Crowdwhat?" That was what we often heard if we used this term until a short time ago, yet the music today seems to have changed. The word crowdfunding is becoming increasingly common use also in our country. From the use of equity models and lending by companies, to the donation and reward-based types used by the third sector and creative people, there are always more social, artistic and business projects being supported through this tool.

The offspring of a crowdfunding campaign, the publishing case of the year, Bedtime stories for girl rebels, was created by two Italian authors, Francesca Cavallo and Elena Favilli. Initially launched on Kickstarter, the campaign raised more than 1 million dollars from supporters from 70 different countries in just 28 Days, for a total of 1 million 300,000 dollars from the launch of the campaign in April 2016 until October of the same year, becoming the publishing campaign to have raised the most funds by crowdfunding. A further signal of the continuous growth of this model is also confirmed in the data published by the Third Report on Crowdfunding in Italy with a total of 41,406,243.66 euros raised in 2017, registering an increase of 45% compared to the previous year.

The average value of the projects funded varies depending on the model from the 6,105.21 euros of Donation/Reward-based to the 55,547.41 euros of lending, up to 268,049.33 of equity.
It is precisely the equity type that registered the highest growth in 2017, with an increase of 150% and funds collected that only in 2017 exceeded 11M euros, bringing the number of companies that have raised capital through the crowd to 78.

When and how to launch a Crowdfunding campaign

A unique, innovative and attractive opportunity for those who want to launch their own project by raising funds, but how do you know when it is the right moment to launch a campaign? And when it is better not to rely on this tool?

According to Chiara Ceretti, fundraiser and expert in crowdfunding for the third sector, it is necessary to ask yourself some key questions before starting: "It takes study and preparation. You must have a concrete objective vision of your objectives and also of your relational heritage", she explains. "The first question is to analyse your own community and find out if the people are internet-friendly".

This aspect is also fundamental for the Equity model, as emphasised also by Giancarlo Giudici, director of the Crowdfunding Observatory of Milan Polytechnic: "You have to start the work well before launching the campaign, know whether you have adequate relational capital, know if you can participate actively, maybe even consisting of other professionals active in the same sector that all have an interest in the development of that project".

It is important then to understand if the project is suitable: "There must be the element of urgency. The campaign will work if there is a clear initiative to support and a deadline. It is essential then to set achievable objectives attainable in predetermined times. For a small association the amount to reach can even be just a few thousand euros". Never forget the fact that the campaign is in itself a job. "Many still today think that crowdfunding is a solution, when instead it is an instrument that requires an investment in order to be used", continued Ceretti. "For this reason it is necessary to plan activities and communication precisely by providing a budget for this aspect". It is an aspect that must always be considered, even when we talk of equity and lending crowdfunding. "Very often the reason why a campaign is not successful is determined precisely by a lack of planning: you put the project online and you think that the funding will come all on its own. That is not how it works. We have to get busy, there is a lot of work to do but also many opportunities".
For many people crowdfunding in fact becomes a genuinely consolidated tool to be reused: "Acquiring the skills necessary to set up a campaign is an investment that requires energy, the result is good and all the more so if the model is replicable, if it is an investment that I can repeat", added Ceretti. "If I decide to experiment with this instrument, then I have to take the possibility of reuse into consideration. In this case then crowdfunding reaches its full potential and can really become a turning point".

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