Mary Kuna, CEcD
The saying “it takes a village to raise a child” can also apply for businesses and economic development projects. The rise of online donation and financing platforms, coupled with the decline in available funding for economic development has led to a growing trend in crowdfunding to complete economic development projects. Crowdfunding is the use of small amounts of capital from a number of individuals to finance a project or business. Crowdfunding is applicable through three models: donations, lending and investment in exchange for equity.
In the field of economic development, crowdfunding has been used to finance entrepreneurial endeavors and real estate development. Entrepreneurs often have limited access to capital. These individuals usually go to traditional circles of friends and family for venture capital. The application of crowdfunding expands the pool of investors beyond these individuals, opening the entrepreneur to a greater amount of capital and a larger market. Entrepreneurs are able to vet their ideas in the market and gain insight from potential investors on ways to improve the product. Investors or donors often receive gifts or discounts from their contribution to campaigns.
For larger economic development initiatives, particularly real estate, crowdfunding is becoming more popular. Crowdfunding investors in real estate take a larger risk in projects and must follow stricter regulations. Real estate crowdfunding often distinguishes investors based upon minimum amounts of investment. The most common investment requirement is a minimum of $5,000. Like any real estate endeavor, investors need to conduct their research before contributing to a project. Unlike investments in small entrepreneurial products, real estate development requires a great deal more time and risk.
In 2015, the University of Cambridge Judge Business School reported crowdfunding in real estate transactions topped $1.2 billion. The National Crowdfunding Association reported over 500 active crowdfunding platforms available in 2012 with the number rising. Over $5.1 billion has been raised through crowdfunding platforms worldwide. With the amount of transactions and individuals participating in the crowdfunding process, it is valuable for governments, economic development agencies, nonprofits and entrepreneurs to take notice.
As with any undertaking, there are a number of considerations to take before investing or donating. Crowdfunding has its risks and rewards. Conduct ample research on the product or investment you are willing to make before doing so. It also is beneficial to research the crowdfunding platform you are planning to use. The National Crowd Funding Association of Canada and the Crowd Funding Professional Organization are two groups that can assist in determining the validity of a crowdfunding site.