Crowdfunding

1. What does crowdfunding mean?

The term crowdfunding, which originates from the English-speaking world, is composed of the two terms crowd and funding. Both terms immediately clarify the idea behind crowdfunding - the financing of a specific project by a group of people.

In German, the term Schwarmfinanzierung is used, albeit rather rarely.

https://www.youtube.com/watch?v=-38uPkyH9vI

2. How crowdfunding works

Crowdfunding is the process of collecting money via the internet for a business idea or individual projects (production of a product, marketing, social projects, etc.). This process usually takes place via so-called crowdfunding platforms.

On the donor side, there is usually a large number of actors who are interested in promoting the crowdfunding project. On the funding side, there can be an individual, but also a group of people or a company.

The funder presents the project to be funded in detail on the crowdfunding platform, often in the form of a short introductory video. In addition, within the framework of a crowdfunding campaign, he or she specifies the amount to be financed and the period of time in which the amount must be raised.

If the required amount is not collected within the specified period, the capital already collected is paid back to the investors. For this reason, the amount and period should be well thought out and realistically chosen in advance. Amounts that are set too high or time periods that are too short increase the risk that the financing will not be realised at all.

3. Classification of the term "crowdfunding"

Crowdfunding can be divided into different variants. The main distinctions are:

  • Donation-based crowdfunding – Crowd-donation

  • Reward-based crowdfunding – Crowdsupporting

  • Lending-based crowdfunding – Crowdlending

  • Equity-based crowdfunding – Crowdinvesting

1. Crowddonation

Crowddonation works exclusively donation-based. Consequently, mainly social projects are financed via crowddonation. Donation-based means that the supporter does not receive anything in return for their funding. It is not uncommon for institutions and companies to participate in donation-based crowdfunding to strengthen their social image.

2. Crowdsupporting

When talking about crowdfunding, the principle of crowdsupporting is usually meant. In this model, the donor receives a concrete service in return for his support. Often, the recipients of the money are categorised according to the amount of funding they have provided, according to which a corresponding reward is given, usually in direct relation to the crowdfunding project (e.g. the funded product itself, a signed album or similar). The invested capital is not normally repaid in this form.

3. Crowdlending

Crowdlending (P2P lending) involves the granting of personal loans or business loans. However, these are not granted institutionally. Instead, crowdlending platforms such as LEND serve as intermediaries between borrowers and the crowd as lenders. The loans are repaid in regular instalments plus an interest rate. By eliminating institutional lending, crowdlending generally allows for lower interest rates on the borrower side.

4. Crowdinvesting

Crowdinvesting is a way for numerous players to participate in primarily young companies with generally smaller amounts. Here, too, corresponding platforms serve to allocate both interest groups. The financiers receive a share of the profits, often in the form of a profit share, in the event of successful business development. The main motive for financiers is the hope of an increase in the value of the company or their own shares in the company.

4. Crowdfunding in Switzerland

Crowdfunding is no longer a secret in Switzerland either. More than 40 platforms are now present on the market and serve the individual segments. The largest Swiss crowdfunding platform is wemakeit, which addresses a broad target group. The crowdfunding market is experiencing constant growth. In 2016, more than CHF 128 million was financed via crowdfunding (2015: CHF 27 million, see IFZ FinTech Study 2018). The majority of this is in the areas of crowdlending and crowdinvesting. This development is likely to continue in the coming years.