Crowdfunding In Investment Banking

Crowdfunding in investment banking may serve as another means to raise funds that can be possibly combined with more traditional alternatives in private equity or debt financing.

Crowdfunding gathers a smaller amount of money from a larger number of investors rather than relying on the big institutions or rich people to raise all the funds. This opened the investment opportunities to common people whereby one could invest in something such as an early-stage company or a real estate project to which earlier days investment was limited only to big investors.

Therefore, crowdfunding would be an extra source of funding for investment banks to help start-ups, new projects or small businesses which probably would not stand a chance in regular banking services.

However, it comes with challenges such as the new regulation and competitions with traditional markets. The innovation opportunity could come in partnership with crowdfunding platforms or even investment banks establishing their own online platforms to connect with themselves with this up-and-emerging space.

Pros and Cons of Crowdfunding

Pros:

1. Access to Capital: Crowdfunding opens access to a more extensive pool of investors that may otherwise not be possible through traditional investment banking. This way, fundraising is democratized since small investors can now participate and eliminate the need to go to banks or venture capital.

2. Market Validation: The concept can be presented to the public so prior knowledge that there can be demand before its launching. Thus, it is a proof of concept that may attract further investment.

3. Community Building via Crowdfunding or the collective pooling and collaborative fundraising efforts may help build a crowd that is also a potential audience of future customers, advocates, or repeat investors.

4. Reduce the risk of business: Venture capitalists never require an entrepreneur to give up equity or take loans, which reduces the total financial risk involved, unlike traditional funding methods.

5. Publicity: Campaigns can create a lot of buzz and attract media attention, which may not be so easy to do in a more standard investment banking.

Cons:

1. Reputational Risks. Failure can impact the reputation of a startup, thereby affecting the funding prospects for future campaigns.

2. Crowdfunding platforms charge a fee, thus making it less cost-effective than traditional platforms. This can be time consuming and might require a lot of work, planning, marketing and constant engagement with your investors.  

3. Uncertain Funding: If the funding goal does not meet, their money will be returned to the backers. At such a time, the business will be back at square one without the capital it thought it had secured.

4. Investment Limitations: Compared to investment banking, crowdfunding typically raises much smaller sums, so that growth potential for the larger projects is potentially limited.

Types of crowdfunding business models

Donation-Based Crowdfunding: This model refers to the situation whereby many people contribute little portions of money in the hope that nothing will be received in return.

It is mostly applied to social causes or some form of community projects. For instance, it aids fund raising through GoFundMe campaigns for medical bills or natural calamities relief.

Reward-Based Crowdfunding: The approach is in the form of small increments from many people in return for rewards, which might range from a simple thank-you note to very early access to a product. Platforms like Kickstarter enable supporters to fund, say, creative projects or receive rewards through exclusive items or experiences.

Lending-Based Crowdfunding: In this model, entrepreneurs raise funds in the form of loans that they repay with interest. LendingClub put platforms between businesses and individuals willing to lend money and is thus very popular among startups trying to raise capital.

Equity-Based Crowdfunding: This model gives the investors equity in exchange for funding a start-up. For instance, Seedrs enables people to invest in early-stage companies in return for equity.

Crowdfunding can make a meaningful addition to the financing of large scaled-projects, as it uses innovative strategies such as tokenization that democratize access to funds.

Tokenization converts asset rights into digital tokens to enable fractional ownership and attract a far broader range of investors, for example to a renewable energy project or real estate development.

This allows greater investment opportunities while confirming market demand through the reception of successful campaigns by institutional investors who want to see public support.

Hybrid models that combine traditional crowdfunders, where crowdfunders are covering a limited finance which is then followed by bank loans or other sources to complete the capital flow can be used for enhancing the general funding strategy as a whole.

Since crowdfunding typically raises smaller sums and imposes regulatory and logistical challenges, the ability for passion of retail investors and public involvement to amplify interest in large projects serves as a potential value add.

However, perceived risks and lack of credibility may keep traditional financing ahead for institutional investors. Thus, crowdsourcing might not ultimately replace the traditional financing instruments, it opens up new opportunities for expanded funding opportunities, project validation, and increased public support for large-scale projects.