Crowdfunding — The Good, the Bad, and the Innovative.

Over the last twenty years, crowdsourcing has evolved from an efficient way for new businesses to collectively solve problems, to an innovative and disruptive business model.

If you’re unfamiliar with the concept, crowdsourcing is the practice of engaging a community or ‘crowd’ and pooling their resources, whether it be technical knowledge and problem-solving abilities, innovation, efficiency, or finances.

One of the significant problems entrepreneurs, startups, and SMEs usually encounter is the reluctance by traditional commercial banks to provide them with startup capital. The main reason for this is that new businesses generally lack the pertinent four C’s of Credit:

Capital — Business assets, usually in the form of services or products, can be liquidated to repay a business loan. Ironically though, you need money to get money, which is a catch-22 for most new businesses as they generally haven’t made any yet.

Character — To be concise, this is showing evidence that your business can and will repay its loan on time — something impossible for a new company to prove.

Collateral — This is the cash contributed to the business. However, most new business owners may have to use personal assets, which is inadvisable, or they secure a co-signer willing to pledge their assets.

Capacity — Since the business is new, there is no track record available to show the viability of the company to make money. Commercial banks want to be sure that they’re going to get their money back.

So how does crowdsourcing provide a solution to all of this?

Using Equity Crowdfunding platform Olive Crowd as an example, founders Dhitoimaraini Foundi & Osman Badat saw that there was a need for another option to traditional commercial bank financing and decided to create a solution.

All projects submitted to Olive Crowd are subject to in-depth analysis and assessment by an independent audit firm.

Then recommendations are made to Olive Crowd. As part of the process, Olive Crowd then brings the projects to a pool of private investors and convinces them to invest in those projects. Investors may ask an indefinite number of questions with regards to the proposed plans and may even ask for a review from an independent expert or firm.

An important point to note is that this type of financing will be done through equity of the companies and not attributed as a debt. Where commercial banks aren’t eager to provide startup capital, Olive Crowd offers funding in return for a shareholding in the applying company.

This type of crowdsourcing model can give hope to new businesses and not necessarily compete with commercial banks while still providing entrepreneurs etc. with speedy financial support, a sense of community and feedback, marketing, and an invested client base.

So what then are the disadvantages to general crowdsourcing?

Unfortunately, publicly displaying or submitting your business idea does carry the risk of having it copied. Also, failed new businesses may damage the reputation of the people and companies who have pledged resources to or invested in them.

Ultimately, as with anything in business, one must examine all available options and make informed decisions before taking calculated risks to determine what is the best choice for them, their new business, and all invested parties.

By Nadine A Jack.

XTM; 2020.