Before writing today’s article, I needed to let you know I heard from the founders of Crowdtilt after a recent blog post I wrote regarding the Top 5 Crowd Funding sites. They wanted to correct a small detail regarding their site. They wanted you to know that they follow the All or Nothing (AoN) approach to crowd funding; in other words, unless the goal is met, credit cards are not charged. They wanted to be sure no one was surprised or disappointed if there was a misunderstanding. Thank you, Marek, for clarifying this for us.
Now that you have an alphabet soup of hyper-funding sites to check into for funding your business, I want to provide some specifics on two of the top sites, as well as some insights into one more type of crowd funding…Peer-to-Peer Lending.
Grow VC (which stands for Grow Venture Community) is based in Hong Kong and has offices in the UK, the US, and Finland. Grow VC is a more complex site that allows startups to receive equity investments up to $1 million per year.
In addition to helping with monetary investments, the Grow VC site includes an “Experts” system. Through this system, those who are “experts” with special abilities or knowledge can offer their “work investment” (in lieu of money) to a startup. There are also beneficial tools on this site that can be used for assessing the value and reputation of a startup.
Another great perk on Grow VC is a “micro investment” model whereby investors can dedicate a monthly budget as low as $20; and Grow VC helps them by providing tools and profiles of startups, including their history.
The fee for Grow VC is 2.5 percent of raised capital, assessed only on successful projects.
CrowdFunder (Beta) –
With CrowdFunder, backers can choose to invest for more than just straight equity. Another option is they can buy a cut of the revenues based on time or a percentage of return. For instance, an investor could “buy” 5% of a company’s revenue for three years or get 10% of revenues earned, capped at a 200% return on investment.
Normally, in traditional, equity-based financing, investors aren’t guaranteed a return on their investment unless the company is sold or offers dividends. Crowd Funder’s differs in that, by buying a percentage of revenue, investors can get a guaranteed return and share in the incremental growth of a company.
Peer-to-Peer Lending –
Also known as Person-to-Person Investing, Peer-to-Peer lenders are companies that leverage already-existing communities in online aggregating lending clubs. They act as the middleman between the ‘Peers’ based on similarities in geographic locations, educational and professional backgrounds or social networks. These Peer-to-Peer lenders handle the lending terms without a traditional financial institution. This particular lending/funding option is targeted at for-profit activity.
The following are Peer-to-Peer Lending options:
- Direct (one specific borrower) vs. indirect (pool) lending
- Secured (collateral based) vs. unsecured (credit rating only) lending
- Prior familiarity of lenders and borrowers (Family & Friends vs. Existing Community)
- Services offered (Lending/Borrower Matching and/or Loan terms and documents)
The advantages of P2P Lending are:
- Borrowers get better rates than at traditional banks (below10%)
- Lenders gets better returns with a quicker turn around
- Less requirements
The major disadvantage…there is more risk for lenders because of fewer borrower requirements.
Lending Club, the first Peer-to-Peer Lender to register its offerings as securities with the Securities and Exchange Commission (SEC), was founded in 2006. The Lending Club also offers loan trading. As of April 2012, Lending Club has originated $600 million in loans and averages $1.5 million in daily loan originations.
Through Lending Club’s website, borrowers are able to create loan listings which supply details about themselves and their requested loans. All of the loans are unsecured and personal, between $1,000 – $35,000.
Approvals for loans are based on the borrower’s credit score, credit history, desired loan amount, and the borrower’s debt-to-income ratio. Loans are only available to U.S. residents in 42 states and can be prepaid any time without penalty. The standard loan period is three years; but five-year loan periods are available if a borrower is willing to pay a higher interest rate and additional fees.
In subsequent blog posts, “Accelerators” and “Super Angels” will be a topic of discussion; and I’ll be sharing some tips for crowd funding and also how to find funders. Finding a way to fund your business these days can be challenging…but exciting, too!