Friday, February 28, 2014, 07:33
Asia Weekly: Crowdfunding: How it works
By CORNELIA ZOU in Hong Kong

Platforms help creators raise funds while giving small investors a wide range of opportunities

Crowdfunding uses the power of large groups to generate capital for specific projects. The range of projects is limited only to the imagination of those who create them and the policies of the platforms that facilitate them.

Although still in its infancy, crowdfunding makes it possible for people with ideas to reach out to the world and attract funding.

By 2025, says the World Bank, crowdfunding could generate as much as $96 billion in capital. More than half of that, about $50 billion, could come from China alone.

Originally launched in the United States, crowdfunding has grown rapidly around the world over the last few years. There are now more than 800 online crowdfunding platforms.

The most famous and possibly largest site is Kickstarter from the US and its close competitor Indiegogo. Upstarts in China including Demohour and Dreamore are still much smaller but growing rapidly. Meanwhile, Singapore’s ToGather has been active since 2012.

From 2009 (when it was founded) to 2013, Kickstarter generated some $815 million from 4.9 million donors and funded some 50,000 projects.

The industry as a whole has grown from around $530 million in 2009 to $2.7 billion in 2012 and about double that the next year, according to Massolution, a research company that specializes in crowdsourcing businesses.

Crowdfunding remains a fairly new concept, one that is generally ignored by legal regimes in Asia.

It was first recognized in the US in the Jumpstart Our Business Startups (JOBS) Act, which President Barack Obama approved in 2012 and which took effect the next year.

The JOBS Act gave crowdfunding a boost by allowing companies to publicly advertise their need for capital in the US for the first time in eight decades, allowing crowdfunding to expand rapidly there.

In turn, it has also grown rapidly in places like Canada, the United Kingdom, Australia and New Zealand.

In Asia, crowdfunding has only started to gain some traction in the past couple of years. In 2012, total funding in Asia was worth $33 million, a little more than one hundredth of the global industry despite the region’s massive population.

Crowdfunding leverages the power of the Internet to raise money through donations or investments, known as pledges. Each pledge is typically small in relation to the overall size of the project, but by bringing together hundreds or thousands of pledges, large quantities of money can be raised.

The idea has been around for some time. It emerged in a more organized fashion after the global financial crisis of 2008, as artists and entrepreneurs faced new challenges raising funds and banks stopped lending to any but the largest and safest clients.

In many ways, crowdfunding was something that had to happen when the type of financing generally done by family and friends was combined with web-based technologies, explained the World Bank in a recent report on the evolution of this funding system.

Crowdfunding remains confusing for many because there are so many platforms and options.

In broad strokes, however, investments or donations are made through a website or a similar online platform. Investors or donors can find a range of projects. For example, there are efforts to help communities that require small amounts of capital to buy books for rural students.

Other projects are more financially sophisticated and seek to attract investors looking to strike it rich with the next great idea. In between, there are thousands of options.

The three general types of crowdfunding are donations, debt and equity.

Donations involve people investing in projects because they believe in a cause. Debt funding involves donors providing funds for a specific project, fully expecting to get it back with interest. This involves peer-to-peer lending networks that bypass banks.

Equity crowdfunding works the way it sounds. People invest in commercial projects and get equity in the project or business in question. As with any investment, the risk is significant. Donors could make money if the business works but could also lose out if the project flops.

Interested investors can find projects in one of some 800 crowdfunding sites in operation globally. Because there is virtually no regulation, the safer investments are done through the larger and better-established websites.

Many of them, like Kickstarter or ToGather, are often picky about the projects they accept and the time they will give each of them to raise specific targets.

Singapore’s ToGather says it is the first pre-order marketplace for Asia that “enables creative individuals to get their products funded”.

The site accepts products from Asia that are at least at the prototype stage. The platform is free to use until the products raise money, and then charges an administration fee of between 8 and 10 percent from the total raise.

Projects that use the site’s own payment gateway to access funds have to pay another 3 to 5 percent.

Product creators are obligated to deliver the products they advertise, regardless of how much they actually raise on the site. While there is little legal regulation, product creators must agree to the site’s terms before they launch a project.

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