Blockchain technology has continued to grow in acceptability over the last decade, with dozens of use cases across different business segments.
The real power of the technology lies in its ability to securely keep track of transactions, in such a way that is publicly verified and virtually impossible to falsify. It does this by keeping an immutable record of how the ownership of asset changes. Thus, it’s a suitable platform for creating and exchanging digital assets.
Notably, blockchain has some inherent advantages that are being applied to the practice of crowdfunding. Likewise, Crowdfunding has also grown in popularity, and is now seen as a viable alternative to venture capital.
But before diving deep into how blockchain is revolutionizing the crowdfunding sector, let’s first take a brief look at the existing crowdfunding landscape.
The Crowdfunding Landscape
Crowdfunding is simply the practice of raising funds for a project or venture by collecting small amounts of money from many people, rather than from one or two major investors. The contribution of capital is accomplished by an underlying agreement for the payment of a profit proportionate to the donation by each financier; although there are also voluntary donations targeted at charity projects.
According to smallbizgenius, the global crowdfunding volume surpassed $80 billion in 2018, and is projected to reach $100+ billion by 2021, surpassing funding to venture capital in the process.
However, the old crowdfunding model is still bedeviled by a lot of challenges which limit its overall benefits to entrepreneurs. For one thing, it’s largely centralized like venture capital, with a central authority overseeing the platforms. As a result, preferential treatment is accorded some projects deemed worthy of more public attention.
Consequently, about 78% of crowdfunding campaigns end up not achieving their goals. Similarly, only 1.2% of the worldwide crowdfunding initiatives reach developing countries, which are starved of the global start-up funding.
The Limits of Existing Crowdfunding Model
As mentioned before, crowdfunding offers numerous benefits to consumers and creators. It helps democratize the investment process, be it for a business, a charity, a work of art, or an invention. Everyone can contribute as little or as much as they want.
Thus, crowdfunding provides a ready-made avenue for entrepreneurs to connect with investors.
But, there are some limitations to this model:
- Rules & regulations:- Most crowdfunding platforms are gatekeepers for the ventures they fund and there are rules guiding the platform usage.
For instance, on Kickstarter, each campaign must produce something, and it mustn’t be a service-based enterprise or a new project. Also, projects on the platform cannot offer equity to micro-investors.
Suffice it to say that anybody who violates any of these vague terms of service could be removed. While this enables the platform to reduce clutter, it also prevents people with innovative ideas from giving their projects the needed visibility.
- The platform cash-grab:- To start with, crowdfunding campaigns depend on the respective crowdfunding platform used. These platforms aren’t actually giving opportunities to people for free. They collect a fee for each project listed.
Most times, this comes at a flat rate, while others demand a percentage of the total amount donated by people. Hence, this poses challenges to entrepreneurs looking to achieve a minimum level of funding.
- Copyright vulnerability:- Some entrepreneurs have seen their business ideas collapse, even before they got any opportunity to launch. Sometimes, when they expose their model on a crowdfunding platform, others would be inspired to rush quickly to the market with similar products.
Even with copyright protection, you may still end up leaking your business strategies to the competition.
- The burden of advertising and marketing:- Having a nice business idea in a crowdfunding circuit doesn’t necessarily guarantee success. You still need to find a way to make the project more visible and attract potential investors to it.
There are usually a “featured” section on most platforms, which shows the most popular projects. Unless you make it to that level of popularity, you’ve little chance of getting any funding help.
As such, you’ve to spend money on advertising, branding, pitching, and marketing campaigns like SEO in order to get the best from crowdfunding platforms. Howbeit, this reduces the capital available for other business operations.
That said, blockchain possesses some key features that are gradually changing the game of crowdfunding. Now, let’s examine a few of these advantages here.
Blockchain for Crowdfunding: A game changer
Blockchain technology offers a decentralized platform for peer-to-peer (p2p) transactions. This means that inventors can raise funds directly from investors without relying on any third-party agent. This provides a lot of benefits for the crowdfunding ecosystem.
First, every project has a fair chance of being visible enough to attract investors. Also, it eliminates the need to comply with obnoxious rules and regulations as seen on existing platforms. Moreover, it makes crowdfunding less exorbitant for both entrepreneurs and investors, since charges are reduced to the barest minimum.
Any business model based on blockchain technology can get funded, since millions of potential investors get to know about the investment opportunity immediately it’s posted on the network. Similarly, any investor with internet connectivity can easily access the network and contribute to the project.
There is really no basic limitations to visibility on blockchain networks, unlike other crowdfunding platforms.
Peer-to-peer (p2p) transactions
Just like Bitcoin and other cryptocurrencies, you can change your stake in a crowdfunded product on a p2p basis like bitqt. This gives investors more liquidity to invest in other businesses. It could also serve as another avenue to make the project more visible on the platform.
In the long run, this innovation can ultimately lead to the development of a new marketplace.
Blockchain also offers asset tokenization which grants entrepreneurs more liberty in funding. They can raise funds by issuing fractional shares and use the capital for expansion. This can be done by leveraging fractional shares directly by, for example, offering employees fractional ownership; thus converting the enterprise into an employee-owned venture. Thus, asset tokenization is a viable funding option for blockchain-enabled crowdfunding projects.
Crowdfunding provides critical utility for businesses and startups to raise the much-needed capital from investors. The steady growth of the sector underscores the fact that the practice has become a necessity for meeting entrepreneurial goals of raising capital to operate.
However, traditional crowdfunding is beset by many challenges which limit their usefulness. Luckily, some of these problems can be tackled with the inherent advantages of blockchain technology, such as decentralization, p2p transactions, and negligible fees. Above all, blockchain allows the reduction of bureaucracy without compromising the security of transactions, such that contributors can seamlessly participate in fundraising.