Solidarity 2.0: Crowdfunding

Crowdfunding is known as the provision of the financial resource required for any product, service, or project from individuals or groupsa

COVER SUBJECT 09.03.2021, 10:58
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Solidarity 2.0: Crowdfunding

A company drew my attention at the Boston Science Fair. They designed a device that could make all bicycles electrical with a system to be attached to the hub of the rear wheel of the bicycle. It really looked promising. I gave my e-mail address to try it, but I could not find the chance afterwards. About a year later, I received an e-mail from the same company saying they had developed a new product and that I could become a shareholder if I wanted. They said that I could support at a rate of USD 100 or more and 10 per cent of the company shares would be sold in this way. They also stated that we could purchase the newly developed kit with a discount on the support rate we would provide. What the company did was a form of equity-based crowdfunding that was spreading rapidly all over the world. In the USA alone, the number of such initiatives funded by the public in 2019 exceeded 1,000, and the funding amount exceeded half a billion US dollars. This is just one type of crowdfunding.

SO, WHAT IS CROWDFUNDING?

Crowdfunding is known as the provision of the financial resource required for any product, service, or project from individuals or groups. People who have new ideas but do not have the financial resources to realise them request support from other people. Crowdfunding is an indicator of how the method known as collaboration turns into an effective tool when combined with communication and financial technologies. With the method that is now used all over the world, small contributions of the individuals on the internet platforms turn into meaningful outputs. An initiative or a social project in its early stage can be supported in this way Today, the number of crowdfunding platforms in the world has exceeded 2,000, and the volume of crowdfunding has exceeded $80 billion. There are four common types of crowdfunding, which is the new face of solidarity, financing, and collaboration. Debt-Based Crowdfunding Share/Equity-Based Crowdfunding Donation-Based Crowdfunding Reward-Based Crowdfunding

HOW DOES CROWDFUNDING WORK?

In equity-based crowdfunding, supporters become official partners of initiatives through online platforms. In debtbased crowdfunding, initiatives are given loans under certain conditions. Thus, the most important contribution of equity or debt-based funding is to provide a new financing opportunity for initiatives. A fixed annual income and a dividend according to the profit of the company are received for the loan. The maturity of debt-based crowdfunding varies between five to 10 years. We can see that debt-based crowdfunding is the favourite among these financing models (with 76% share), supported by small contributions of citizens. Equity-based crowdfunding follows it by 21 per cent. The volume of debt and equity-based crowdfunding is increasing every year. In 2017, $1.7 billion of financing was provided to 24,000 businesses through these methods in Europe. The target audience of this alternative financing is not major companies that can access finance but rather innovative initiatives with promising and proven products or services that need financial support. Although these types of crowdfunding took a very small place in previous years, their volume increases every year with the development of technological opportunities, and the legal gap regarding these processes is closed. As of 2019, equity and debt-based crowdfunding in the UK reached a level that will constitute 16 per cent of the total investments made for initiatives.

Another most well-known type of crowdfunding is the reward-based crowdfunding platforms. Here, entrepreneurs offer some material or immaterial rewards to users in return for project/initiative support over internet platforms. For example, you can collect the funds required for your underwater drone project, or a set for at-home vertical farming, or a documentary through crowdfunding in return for some rewards. And rewards could be a discount on the product set, a thank you letter, a T-shirt, or an invitation to the premiere of the documentary. Reward-based crowdfunding is a more common type due to the more flexible legal regulations. The most well-known crowdfunding platforms in the world are GoFundMe, Indiegogo, Kickstarter, Patreon, and Teespring. Among them, Kick starter alone has raised $815 million since its foundation in 2010. It has mediated the realisation of 50 thousand projects with the funds it provided from a total of 4.9 million people. Looking at the projects, we can see that they have spread to many areas such as film, music, journalism, games, technology, publishing, and food. On the other hand, donation-based crowdfunding allows traditional aid activities to be carried out in a more organised and structured way. For example, the US-based crowdfunding platform Donorschoose was established to meet the needs of teachers by citizens. Particularly in countries without a social state understanding, people in need or environmental campaigns are supported through donation-based crowdfunding. The European Alternative Finance Report, which is prepared every year, draws attention to the experience gained, the new technologies developed in this process, and the interest of the citizens in this new type of financing.

AND WHAT IS THE STATUS OF CROWDFUNDING IN TURKEY?

Six reward or donation-based crowdfunding platforms are operating in Turkey as of December 2020 While there are no equity or debt-based platforms yet, we know that a company (Fonbulucu - Fund Finder) has applied for a license to the Banking Regulation and Supervision Agency (BRSA). The successful examples we know show that crowdfunding can be an alternative source of financing for entrepreneurs, non-governmental organisations, and public institutions if the necessary legal framework is provided and awareness increases.

Ankara Social Sciences University, Department of Economics Assoc. Prof. Seyithan Ahmet Ateş

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