Funding a Revolution
Where do musicians who don’t feel up to appearing on the next version of The X Factor go to get a record made? Or talented script writers who don’t have a direct line to Hollywood go when they want to see their script come to life? Or for that matter ordinary people who have an idea for an App or any new business but don’t have the resources to get it built, tested and marketed?
They all used to go on a journey that involves tireless cold calling, door knocking, visiting every bank and successful business person they know…the old fashioned way. Maybe after weeks, months or years of this and some helpful advice along the way, they would come across a company or organisation that would agree to fund them. That journey now looks vastly different, and it’s all being done online, with the help of one of a few crowd funding websites (something we predict there will be many more of before too long). The landscape for projects, new businesses, tech startups and small businesses has changed and money for new ventures is coming from the ones who will eventually be end users of the product, no matter what the end product might be. Everything from a game, to an art exhibition or new reality tv show or dog shelter in need of more supporters can be set up with a fundraising page and benefit from crowd funding.
Apart from established businesses and brand names, or those seeking a straight personal loan, anyone serious about exploring their finance options is considering crowd funding. So much so that on August 14 the Australian Securities and Investments Commission (ASIC) issued a formal guidance for people thinking about trying it an idea of their main risks and responsibilities.
We want to make sure anyone involved in crowd funding is aware of these obligations to ensure they operate within the law and don’t potentially expose themselves to penalties under the Corporations Act or ASIC Act - ASIC Commissioner, Greg Tanzer explains.
Starting a Successful Campaign – The Art of Crowd Funding According to Creditworld
For anyone thinking about using a crowd funding website such as Kickstarter, RocketHub, IndieGogo or Australian website www.start.ac there are a few things to keep in mind and make the most of it. Here is creditworld’s very own guide to successful crowd funding.
For every crowd funding success story there are always a number of ventures that don’t get off the ground. Anyone thinking about crowd funding their own project can find countless helpful articles from tech and internet gurus, as well as web marketing experts. Here are a few key tips we’ve picked up from the best articles on the topic so far:
1) Tie your venture to an established network of first degree supporters, so you will know you have some guaranteed backing when you launch. Talk to people and have them pledge their support in advance, even if it’s only a tiny amount
2) Have a clear, distinctive value proposition that can be explained in a simple sentence, or a picture story. Trying to sell an inventory management system will be a lot harder than a budgeting app that will help you save money! It also helps to make people understand how your project will be achieving a larger overall mission, such as bringing back a dead genre, enhancing a worthy cause…or getting the country to be more financially aware
3) This one sounds obvious, but you need to plan your marketing campaign in advance for each stage of the process, and plan for bumps in the road. Study successes and failures, learn from them and take the time to have your social media profiles and marketing tools set up before you go live with the campaign
4) Listen to feedback from supporters. If those who have pledged money already are telling you something, take it on board and act on it where appropriate. These people are invested in what you are trying to achieve, and want you to succeed so take their advice and don’t move forward with blinkers on
5) Along similar lines to point 4 – don’t ask for more money than you realistically need and don’t alienate potential donors by restricting the amounts they can give
6) Personalise rewards that will suit all target donors. Things such as an advanced copy, exclusive access, credit as a producer or merchandise could all be considered great rewards. If it’s appropriate, give backers a chance to vote on how some aspect of the finished product turns out
7) Avoid major crowd funding mistakes. Basically really make sure you’re not anything from the first six points! So if nobody knows who you are yet, try getting some basic PR and awareness about your project out there first, rework your pitch if it’s too long, confusing or complicated, keep your existing backers happy, and up to date with progress and stay connected to them and keep your goals realistic and monitor every aspect ready to make necessary tweaks along the way. Looks like those hours spent pounding the pavement are now hours pounding the keyboard and probably the phones too – but the results should come much more quickly!
If you are thinking of starting your own crowd funding venture you’ll also need to be sure of what other laws apply. The ASIC spokesperson confirmed the following to creditworld:
- Some types of crowd funding can be considered the same as advertising a financial service or product, or fundraising through securities, which requires its own separate disclosure document
- If the business is considered as advertising a financial service or product then the website will be regulated by the Corporations Act and the Australian Securities and Investments Commission Act
- A requirement under the Corporations Act for people carrying on those activities is having a financial services licence. One of the conditions of the licence is that there be an internal dispute resolution process
- Crowd funding may also be governed by the Competition and Consumer Act 2010, meaning it comes within Australian Consumer Law
What are the risks?
Whether you’re starting your own crowd funding campaign, or thinking about donating to one, there are some risks to be aware of. Even if you are only donating, it is important to understand that the owner of the project might be unable to pay your money back through something that is no fault of their own. ASIC provided creditworld with recommendations on how to minimise risks as a project participant or donor.
The project doesn’t go ahead: The biggest risk for all involved is that the project doesn’t get completed, which means that as a sponsor you don’t receive the promised reward.
Asic says:This can be managed by website operators. They can assess the viability of a project being considered, and require background checks and credentials from those who create projects. Project creators can also be asked to supply details of how and when the project will be completed and report on progress through the website periodically.
Fraud by the website owner: Those who use crowd funding websites need to understand that they are placing their trust in the owner of the website and that there is a risk the owner of the website could commit fraud by keeping the money collected
ASIC says: Website operators can help manage this risk by doing background and credentials checks on project creators to help minimise the opportunity for fraud.
Money lost through bankruptcy before reaching the project creator: Apart from the risk of fraud, the website operator could declare bankruptcy and not be able to return money donated to individual projects.
ASIC says:The website operator can manage this risk by holding all crowd funding money in a trust account separate from its own assets, avoiding excessive holding periods and implementing appropriate internal controls to ensure withdrawals are appropriate.
ASIC has produced a guide to the details on donating to a crowd funding project for its Money Smart website for those who want to pledge money. All those details are available here.
Peer to Peer lending: Crowd funding for personal loans and investors
Crowd funding as a concept is always tied to a specific project or business, but there is also a new way of applying for a straight personal loan whether it’s for a house, car, travel or all three. It works on exactly the same principal for the borrower, and will appeal to those looking for a solid return on investment. Enter Society One, Australia’s first peer to peer lending website, officially launched on August 22. Society One connects borrowers directly with investors who bid to fund the loan at an attractive interest rate.
"Personal loan shopping can adversely affect your credit history because each bank application creates an enduring record on your personal credit file" - notes the website’s co-founder and ceo Matt Symons.
Because it's painful to apply for a loan at multiple banks most people end up applying for just one and accepting whatever rate they are offered. As a result the personal lending category lacks the competitive pricing tension that has emerged in areas like term deposits and home loans
Society One works on a highly successful peer to peer lending model, dubbed ‘ebay for loans’ by Symons which has been used by UK lender Zopa to capture somewhere between 2-3% of the UK personal loan market. US equivalent Lendingclub has also used the model to issue around US$1billion in personal loans in that market. “We’ve been receiving a lot of queries from people wanting to better understand our model,” he tells creditworld. “Loans get assessed by a traditional bank underwriting process. Peer to peer lending replaces the need to have a wholesale lending facility sitting behind a consumer finance company. Together with an online operating model it is really a much more efficient way to build a consumer loan book.”
The fact that Society One and the model of peer to peer lending it uses is online only is also significant to its success, according to Symons.
Peer to peer is disruptive, as it’s entirely online. What we’re providing is an example of how you can bring competition to the sector.
During the month of August 2011 Lending Club had $27 million in total new loans, and as at 17 August 2012, that figure was already 53 million for the first half of the month.
According to Symons the key to success with peer to peer lending is the ability to offer borrowers a better rate and investors attractive returns, and that is supported by a rigorous credit checking process. Society One has to target the right borrowers, who have a good credit history and represent a low default risk, he tells creditworld. At present only sophisticated investors are able to invest in an existing pool of diversified consumer loans, though others are able to register their interests and in time retail investors will also have access and be able to invest in the platform.
For us it’s very clear that viability depends on being able to do a very very good job. We appeal to quality borrowers in the first place.
There is evidence that it works just as well as it does for the banks and institutional lenders, too. Looking again at overseas examples such as Lending Club, the default rate for loans on peer to peer lending models is extremely low, at 0.98%. In the UK Zopa had a net write off of around 0.91% of its loan book compared to Bank of England data showing an aggregate loss rate for the major UK banks of more than 3.75%.
While personal loans are the key market for Society One at the moment, Symons identifies other areas within the banking sector that stand to benefit from similarly disruptive business model, such as payment options and wealth management. "There is no reason peer to peer lending couldn't work in other consumer lending categories," he concludes.
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