What Is Crowdfunding?

Crowdfunding is the process of providing the necessary funds for the realization of a project, service, product or initiative through promotions on digital platforms. There are three key elements to crowdfunding:

• Project owner

• Person funding the project

• Crowdfunding platform

In the crowdfunding process, there is no obligation for the project or venture owners to be entrepreneurs. Crowdfunding requests can be launched for many different ideas and areas such as non-profits, start-ups, initiatives etc. People who fund the project, on the other hand, have the opportunity to fund the project for investment or support, depending on the preferred crowdfunding method.

How Crowdfunding Works?

Crowdfunding has created the opportunity for entrepreneurs to raise hundreds of thousands or millions of dollars from anyone with money to invest. Crowdfunding provides a forum for anyone with an idea to pitch it for waiting investors.

An amusing example for a crowdfunding project was from an individual who wanted to create a new potato salad recipe. His fundraising goal was $10, but he raised more than $55,000 from 6,911 backers. Investors can select from hundreds of projects and invest as little as $10. Crowdfunding platforms generate revenue from a percentage of the funds raised.

What Are The Types Of Crowdfunding?

There are different types of crowdfunding methods. Some examples of crowdfunding are listed as follows.

• Securities-based crowdfunding provides opportunities for people to invest in private companies (such as startups). In this type of campaign, investors receive the promise of stock, future shares, or another security issued by the company in exchange for capital.

• Donation-based crowdfunding is when someone donates to a specific cause or charity.

• Reward-based crowdfunding is exactly what it sounds like. People donate to unlock a specific reward linked to the project they support. For example, you might help fund a new product line and later receive that product in return.

• Peer-to-peer lending allows individuals to obtain loans directly from other individuals without a bank or other financial institution acting as a middleman. We can think of this as debt crowdfunding.

How To Start Your Own Crowdfunding Campaign?

1. Select your platform: Start by choosing between a rewards or equity-based platform. Find out how long the different platforms allow campaigns to run. What’s the limit on how much you can raise? And find out who will see it. Certain platforms might attract different types of backers.

2. Get accepted by the platform: Fill in the online forms and provide the documentation platform operators need. The platforms need to check whether you’re legitimate. An offer document or prospectus may be required if you’re looking to use an equity crowdfunder. This sets out the details of the investment, any prescribed risk warnings, and cooling-off periods for investors.

3. Make your pitch: Once accepted by the platform, you have a place to make your pitch. Describe your project or idea, why you want funds, and how much you’re hoping to raise. If it’s a rewards-based platform, list what backers will get. For an equity-based platform you’ll need to state what the equity stake is and the share price – if it can be determined.

The pitch phase can require a lot of work. It’s a full-on marketing campaign to promote your project or business and make it attractive to investors. And it may involve frequent updates to keep the interest going. Your business needs to use its customers and fans on social media channels to get the word out.

With an equity crowdfunding campaign, you’ll need to share your business and financial information with complete strangers. That includes up-to-date company information, financial statements and forecasts, a credible business plan, and – if you’re an existing business – a realistic valuation.

4. Campaign end: With some social crowdfunding platforms you get all the donations raised during the campaign. With others, you have to set a target and only get the cash if you reach it.

With equity crowdfunding, you’re given a time frame to attract investors. If you’re successful, the platform arranges the payment of the funds to you and issues share certificates or convertible notes to the investors. If you don’t attract investors, you may be able to extend the deadline.

These platforms make their money through fees – for instance a percentage of the amount raised plus transaction fees. Some also take equity. Some won’t charge a fee unless you’re successful. They’re doing a lot of the administration and, in the case of equity platforms, they’re handling the legal compliance which can be complex to do on your own.

What Are the Advantages of Crowdfunding?

• It can be a fast way to raise finance with no upfront fees

• Pitching a project or business through the online platform can be a valuable form of marketing and result in media attention

• Sharing your idea, you can often get feedback and expert guidance on how to improve it

• It is a good way to test the public's reaction to your product/idea - if people are keen to invest it is a good sign that your idea could work well in the market

• Investors can track your progress - this may help you to promote your brand through their networks

• Ideas that may not appeal to conventional investors can often get financed more easily

• Your investors can often become your most loyal customers through the financing process

• It's an alternative finance option if you have struggled to get bank loans or traditional funding

What Are the Disadvantages of Crowdfunding?

• It will not necessarily be an easier process to go through compared to the more traditional ways of raising finance - not all projects that apply to crowdfunding platforms get onto them

• When you are on your chosen platform, you need to do a lot of work in building up interest before the project launches - significant resources (money and/or time) may be required

• If you don't reach your funding target, any finance that has been pledged will usually be returned to your investors and you will receive nothing

• Failed projects risk damage to the reputation of your business and people who invested

• If you haven't protected your business idea with a patent or copyright, someone may see it on a crowdfunding site and steal your concept

• Getting the rewards or returns wrong can mean giving away too much of the business to investors

Crowdfunding in Turkey

The crowdfunding system in Turkey started to be implemented in recent years. Crowdfunding has been incorporated into Turkish Law as a finance tool. While the investor provides financial support in the crowdfunding system, the entrepreneur undertakes to give the promised reward, share or loan in return. In our country, it is possible to create fund support with the crowdfunding system in line with the framework of the Turkish Commercial Code and the Capital Market Law. Today, fund supports obtained from the crowdfunding system in Turkey are generally carried out under the titles of donations, aids or sponsorships.

With the necessary authorizations obtained from the Capital Market Authority and relevant authorities it is possible for foreigners to open and manage their own crowdfunding platform also. Both platforms located abroad but providing marketing operations to Turkey or providing a Turkish website and domestic platforms are subject to Turkish Law regarding crowdfunding.

Crowdfunding platforms are nowadays digital platforms that intermetiate crowdfunding projects. In order to open a crowdfunding platform companies must be in line with some criteria mainly; the company must be joint stock, at least 1 million TRY paid capital, an investment committee consisting of 3 members (which have experience in finance, business management, legal consultancy, technology, industrial or trade experience etc.), a board of directors, each members meeting the requirements regulated by Capital Market Regulations, and the company name must include Crowdfunding Platform. Other criterias are present regarding the board of directors, the articles of incorporation and the elements may differ depending on the type of crowdfunding to be done.

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