According to experts, there are five key benefits of crowdfunding platforms: efficiency, reach, easier presentation, built-in PR and marketing, and near-immediate validation of concept, which explains why crowdfunding has become an extremely useful alternative to venture capital (VC), and has also allowed non-traditional projects, such as those started by in-need families or hopeful creatives, a new audience to pitch their cause.
To date, $34 billion has been raised through crowdfunding initiatives, adding roughly $65 billion to the global economy in line with projections that show a possible $90 billion valuation for all crowdfunding sources, surpassing venture capital funding in the process.
Limitations of Current Crowdfunding Platforms
1. High fees: Crowdfunding platforms take a fee for every project listed. Sometimes, this is a flat fee while others require a percentage of the total proceeds raised by contributors. This cut into the availability of funds and strains the fundraising process when start-ups are looking for every single dollar to help.
2. Fine print rules and regulations: Not all platforms accept services as a possible project and demand real tangible products, such mindset cripple’s innovation and narrow the horizon of new products and services.
3. DIY Marketing and Adverting: With few exception platforms will not help with spreading the word about new startups, which means startups need to pay for marketing and adverting yet another strain on limited funds available for them, and take their focus from innovation and creativity.
4. Scam startups: In some cases, startups turn up as scams and produce nothing leaving investors with empty hands and no way to get their money back.
5. Intellectual property risk: In some case startups have no protection of their IP , and leaving them exposed to experience investors who can take the idea and enter the market early with all the resources they have.
With all the above limitations of current crowdfunding platforms, blockchain technology, among all its benefits, can be best put to use by providing provable milestones as contingencies for giving, with smart contracts releasing funds only once milestones establish that the money is being used the way that it is said to be. By providing greater oversight into individual campaigns and reducing the amount of trust required to donate in good conscience, crowdfunding can become an even more legitimate means of funding a vast spectrum of projects and causes.
How Blockchain helps Crowdfunding
1. The Magic of Decentralization: Startups are not going to rely on any platform or combination of platforms to enable creators to raise funds. Startups no longer be beholden to the rules, regulations, and whims of the most popular crowdfunding platforms on the internet. Literally, any project has a chance of getting visibility and getting funded. It also eliminates the problem of fees. While blockchain upkeep does cost a bit of money, it will cut back drastically on transaction fees. This makes crowdfunding less expensive for creators and investors.
2. Tokenization: Instead of using crowdfunding to enable preorders of upcoming tangible products, blockchain could rely on asset tokenization to provide investors with equity or some similar concept of ownership, for example Initial Coin Offering (ICO). That way, investors will see success proportional to the eventual success of the company. This could potentially open whole new worlds of investment opportunity. Startups could save money on hiring employees by compensating them partially in fractional ownership of the business, converting it into an employee-owned enterprise. Asset tokens become their own form of currency in this model, enabling organizations to do more like hire professionals like marketers and advertisers.
3. High availability and Immediate provision: Any project using a blockchain-based crowdfunding model can potentially get funded. Also, any person with an internet connection can contribute to those projects. Blockchain-based crowdfunders wouldn’t have to worry about the “fraud” that have plagued modern-day crowdfunding projects. Instead contributors will immediately receive fractional enterprise or product ownership.
4. Smart Contracts to Enforce Funding Terms: There are several ways in which blockchain-enabled smart contracts could provide greater accountability in crowdfunding. Primarily, these contracts would provide built-in milestones that would prevent funds from being released without provenance as to a project or campaign’s legitimacy. This would prevent large sums of money from being squandered by those who are either ill-intended or not qualified to be running a crowdfunding campaign in the first place.