FinTech Tip: Investor Guide To Crowdfunding, Crowdlending, Crowdvesting, Crowdfinance, Crowd___. Terms 101.
Disclaimer - I am selfishly writing this post so that Small & Midsize Businesses that we support at FundPaaS, can raise capital from what we call CustVestors or customers turned investors by first educating them on the crowdfunding lingo. I am also trying to protect investors and increase financial literacy; a long term passion of mine since completing Morgan Stanley's Reach For Excellence program in 2007 where I focused on bringing financial services to underbanked groups and a few years later, the same passion continued as I started my first FinTech business in 2011, BuckSprout. One of the earliest Robo-Advisor startups seeking to automate the investment management process for $10 a month. I use to say that we had a 3D vision to Democratize, Demystify andDisrupt the Financial Advisory process. Not sure if it worked but I hear that #FinTech and #Robo-Advisors are the talk of the town nowadays. Perhaps the most expensive lesson I've gotten on timing.
Let's start with definitions:
noun: fund; plural noun: funds
1. a sum of money saved or made available for a particular purpose.
verb: fund; 3rd person present: funds; past tense: funded; past participle: funded; gerund or present participle: funding
2) Crowdfunding: (not new by the way)
Yes, is that simple. The crowd, a set of individuals and/or entities, providing money for a particular purpose. Crowdfunding has been around for a long time (1885 has a cool example below) but limited to pooling money without an expectation of financial return (not an investment per se). Until the passing of the JOBS Act in 2012, crowdfunding as an investment using general solicitation means like social media was not possible. Below is a quick summary for how to fundamentally distinguish and parse through crowdfunding portals in the future.
Crowdfunding types Crowdfunding (i.e. not investments)
The first recorded successful instance of crowdfunding online occurred in 1997, when a British rock band funded their reunion tour through online donations from fans. Inspired by this innovative method of financing, ArtistShare became the first dedicated crowdfunding platform in early 2000s. (fundable) One of earliest incidence of crowdfunding can also be seen in one of the world’s most famous landmarks. "The Statue of Liberty was partially funded by the crowd after the American Committee of the Statue of Liberty, who were tasked with raising the money for the statue, fell short by more than a third and the New York Governor Grover Cleveland rejected the use of city funds to pay for it. That was 128 years ago in the summer of 1885" source
The statue’s savior came in the form of renowned publisher Joseph Pulitzer who decided to launch a fundraising campaign in his newspaper The New York World. For the curious and history buffs (ehm fellow nerds, go here)
Equity | Debt Crowdfunding Timeline
More here: FinTech $50MM answer to the SMB Funding Question
It's just becoming apparent to folks entering the industry from traditional financial services backgrounds, that educating even the most sophisticated investors is still necessary as many of them tend to confuse crowdfunding as only something related to donations or rewards given that the earliest pioneering platforms, Kickstarter (est. 2009) and Indiegogo (est. 2008) are NOT investment platforms. They are portals where anyone willing to support any cause, small business or otherwise, can pool funds together to get a product, t-shirt, public mention, perks, etc in return but not a check in the mail.