In: Finance
An independent movie producer with a modest but loyal fan base is short of funds for her next movie. Knowing that a bank loan is an unrealistic option, she is considering crowdfunding. But she is not very familiar with it or how to go about starting and conducting a crowdfunding campaign.
Prepare a report for the producer explaining the different approaches to crowdfunding, including the equity funding approach. Alert the producer to any drawbacks that might make people less willing to contribute to funding her movie and positives that might make people more likely to fund her movie. Conclude your report with a recommendation of which crowdfunding approach you believe would be most effective for this independent movie producer.
There are four (4) main categories of crowdfunding campaigns based on what (if anything) the person contributing the money can expect to receive in return. The four types of campaigns are: (1) donation based crowdfunding; (2) rewards based crowdfunding; (3) debt based crowdfunding; and (4) equity based crowdfunding.
Donation based
crowdfunding is exactly what you might think. It is a type of
funding campaign where the person or company running the campaign
is not expected to give anything in return to the contributing
persons. In a donation based crowdfunding campaign the contributing
persons (i.e. the “crowd”) give money or other resources to the
person/entity running the campaign simply because they want to
support the idea or cause. In my party example these would be the
people who give me money for party supplies even though they will
not be able to make the party (aww, thank you guys!).
These types of crowdfunding campaigns work well for fostering social causes, community projects, charities etc.
Rewards based
crowdfunding describes a funding campaign where the individuals
contributing money can expect to receive varying levels of
“rewards” that correspond to the amount of money they contribute.
Typically the “reward” is a product or service that that the
particular company running the campaign produces or provides (or
some discount to acquire the product/service) and there are at
least three (3) levels of rewards based on the level of
contribution. In my party example, these would be the people who
give me money for party supplies because they want the “reward” of
coming to my party (I throw great parties).
Reward based crowdfunding has been around a long time. Anyone remember P.B.S. pledge drives??? A $10 dollar contribution may have gotten you a big bird t-shirt but you better dig deep if you wanted that P.B.S. tote bag let alone a lunch with Bob Vila (if you don’t know Bob Vila you better ask somebody). An old example I know, but I only bring it up to show that the concept existed well before we gave it a name. Today rewards based crowdfunding is one of the most popular types of crowdfunding and has been brought into the spotlight by the popularity of sites such as Kickstarter and Indiegogo.
Rewards based crowdfunding campaigns tend to work particularly well for consumer goods and other tangible products.
In a debt based
crowdfunding campaign, the person or company running the campaign
is essentially looking to borrower money from multiple people. In
return, the individuals agreeing to lend money to the company
receive the person’s/company’s binding commitment to repay the
amount at set time intervals and at a set interest rate. Put
simply, the people are giving money to the person/company in
exchange for a big I.O.U. In my party example, these are people I
invite who won’t just give me money for party supplies but say they
would be happy to lend it to me if I agree to pay it back, with
interest (these people don’t get invited back, in case you were
wondering).
Debt based crowdfunding campaigns are particularly popular with entrepreneurs who don’t want to give up equity in their start-up companies immediately and/or do not have access to more traditional types of loan facilities. They are also growing in popularity as a way for real estate developer to fund a particular real estate project or projects (I call this type of real estate crowdfunding, a “recfund”).
Finally we have equity
based crowdfunding. In an equity based campaign, a person
contributing money can expect to receive some ownership in the
company which is raising the funds. Put another way, the company
running the campaign is selling off a piece of its ownership (e.g.
shares, membership interest, etc.) to each of the crowd members
contributing money. Assuming the company does well, the
contributing crowd members may realize a return on their investment
by receiving a share of the profits in the form of a dividend,
distribution etc. In my example, these would be the people who
don’t want to throw the party themselves but want to give me money
for supplies so I can throw it and that they can tell everyone that
they are a “co-host” of the party. As a co-host they can share in
the credit when everyone comments on how awesome the party is (I’d
give an example of what happened if a party of mine was bad, but
that never happens).
Equity crowdfunding in the U.S. has been on the rise ever since the passing of the Jumpstart Our Business Startups (JOBS) Act in April of 2012 and is expected to be one of the biggest sources of funding for start-ups and small business in the near future. That being said, current legal and regulatory restrictions make this type of funding campaign the most complex and costly to facilitate.
Equity based crowdfunding campaigns are being used more and more by entrepreneurs and start-ups seeking an alternative to traditional venture capital and angel investors when looking for a capital infusion to take their business the next level.
- I believe that debt based crowd funding approach would be most effective for this independent movie producer because, the people who were funding will expect a return from their investment. In this type of funding investors will get interest on the money they have invested and producer can also get some relax time to repay the investment.