The democratization of business funding: Why every business should be aware of new forms of funding
26 July 2022
No doubt about it, businesses need money to grow. While, traditionally, this money would come from a loan or selling equity stakes in the business, today’s organizations can benefit from alternative funding platforms and mechanisms that promise to connect businesses directly with investors and donors. In other words, it’s no longer essential to go through the powerful gatekeepers of old, such as banks, brokers, and investment funds.
Let’s look at four funding trends that could influence how your business accesses capital in the future.
Trend 1: Crowdfunding
Crowdfunding is probably the most widely known of these funding trends. It’s popular, fairly well established by now, and it works; to date, more than $34 billion has been raised worldwide by crowdfunding. Crowdfunding basically involves raising money online for a specific goal or venture via a crowdfunding platform that connects you with donors. While crowdfunding is perhaps best known as a way for individuals or creatives to raise money, it’s also a legitimate way for businesses – including startups and established organizations – to raise funds. Indeed, there are crowdfunding platforms out there that specialize in specific types of fundraising for organizations, such as SeedInvest Technology (aimed at startups) and Mightycause (which is for nonprofits).
Trend 2: Initial coin offerings (ICOs)
You’ve heard of IPOs. Well, ICOs are the cryptocurrency equivalent. Instead of selling shares to investors, as you would with an IPO, ICOs involve raising funds from supporters, who, in turn, receive the blockchain equivalent of a share: a cryptocurrency token or “coin.” An ICO is a bit like a crowdfunding campaign, then, except ICO backers potentially get a return on their investment (whereas crowdfunding supporters are effectively “donating” money). ICOs also differ from crowdfunding and IPOs because backers buy their tokens using digital currency. It’s fair to say that ICOs are more popular with startups than established businesses, and particularly with blockchain startups.
Trend 3: Tokenization
Closely related to ICOs we have the tokenization of assets. Here, assets are broken up into blockchain tokens, so people can invest in part of an asset. The basic idea is there are plenty of people out there who are happy to have a little piece of a big pie, so why not offer that to them? Therefore, tokenization allows investors to purchase tokens that potentially represent just a tiny, tiny percentage of the underlying asset. The token could represent something like a share in a company, or part-ownership of a piece of real estate, a stake in a piece of fine art, participation in an investment fund, or even a commodity such as gold – crucially, the underlying asset is something that can be traded on a secondary market, giving investors greater peace of mind.
Trend 4: Special purpose acquisition companies (SPACs)
SPACs are nothing new, but they’ve certainly gained momentum in recent years. In 2020, SPACs raised $83 billion in funding across the whole of 2020 and $26 billion in January 2021 alone – and that's just in the US. Some people are saying the bubble is due to burst, but obviously, no one knows what the future has in store…
A SPAC (also known as a “blank check company”) is a shell company that’s formed specifically to raise money through an IPO in order to buy – and ultimately bring to market – a private company. These SPACS have no existing business operations or even a stated acquisition target (there is usually an acquisition target in mind – it just isn’t publicly stated). Therefore, it’s a way of raising money without the paperwork and rigors of a traditional IPO. Having raised the money needed, the SPAC then has two years to complete an acquisition (and if it doesn't, the money must be returned to investors). Then, once the merger is complete, the company is usually listed on a major stock exchange, potentially creating a huge upside for investors.
Quick case study: The Braid movie
I like this example because it pulls together strands of crowdfunding, ICOs, and tokenization. Director Mitzi Peirone’s 2018 debut movie (which is also known as Nobody Leaves) was financed through a token “crowd sale” that raised $1.7 million, making it the first major US feature film to be fully funded by cryptocurrency. The money was raised via WeiFund’s platform, which is based on blockchain, smart contracts, and cryptocurrency technology. Investors in the movie reportedly receive 30 percent of the film's profits.
Could this model disrupt traditional movie financing – which typically relies on big Hollywood financiers or crowdfunding campaigns (where donors don't receive a share of the profits)? That remains to be seen, but it certainly shows that alternative funding mechanisms like ICOs can help creatives, entrepreneurs, and business leaders achieve their goals.
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