Online business ideas. Crowdfunding, Venture Capital and Business Angel. Forms of financing compared

An innovative idea, a potential new business, in order to be developed needs funding and a technology partner who can work alongside the entrepreneur.
Neikos, in its 20 years of experience, has contributed to several portals and vertical solutions, custom applications aimed at sales or communication.

Funding an idea today is possible through standard funding channels such as:

• banks
• facilities
• contributions
• other forms that deserve further study, given their success in Italy and abroad.

The main forms are Crowdfunding, Venture Capital and Business Angel.

We conducted this research to help the reader understand the differences between different forms of financing.

CROWDFUNDING

Crowdfunding is a collaborative fundraising process, usually implemented online.
A group of individuals contribute small but valuable efforts, making it possible to fund projects and/or initiatives.
It is a bottom-up microfinance practice that mobilizes people and resources.

The term crowdfunding considers three main factors:

• crowd or crowd, the funders. It represents a community of individuals who, aggregating on online platforms, spontaneously decide to contribute financially to a project or initiative, supporting its implementation.
  The ability to address an open-call to the crowd is a feature that Crowdfunding inherits from Crowdsourcing, a business model employed in many corporate settings.
  It allows the crowd to be entrusted with different stages of marketing and production of a given good and/or service by those who have an interest in bringing value to the business proposition through their technical and commercial skills.
  The difference of crowdfunding with crowdsourcing lies in the fact that in the former case the support required from the crowd is the contribution of financial resources.
• funding, bottom-up fundraising through a multitude of parties contributing modest financial resources.
• Crowdfunding platforms. Web applications that enable dialogue with the crowd to get ideas, raise funds and memberships.

COLLECTIVE FUNDING PLATFORMS

Crowdfunding platforms are collective funding platforms.
Websites that facilitate the matching of demand for funding from project proponents and the supply of money from users.
They can be distinguished on the basis of sectoral choice and their territorial focus.

With reference to sectoral choice, we find two types of platforms:
– generalists, they collect projects from every area of interest;
– vertical (or thematic), specializing in projects of particular sectors. In Italy, there are examples of industry platforms ranging from publishing to social lending.

Regarding territorial vocation, platforms can be:
– national, the platform does not have a territorial vocation and does not aim at the enhancement of the local community.
The territorial factor is not a pillar of its vision;
– local, accommodate projects that produce spatial effects for a specific region or locality.

Among the most prominent globally are Kickstarter, IndieGoGo, RocketHub, Quirky, GoFundMe, CrowdTilt, Razoo, and Crowdrise.

The most active companies are:

-Kapipal, founded in 2009. It calls itself a site for raising money online. Generalist platform that allows financing of any project;
-Eppela, a reward-based platform founded in 2011. Allows funding for innovative projects in the fields of art, technology, film, design, music, comics, social innovation, writing, fashion and nonprofits;
-Starteed, founded in late 2011. Help people finance their ideas with financial and social support from the Starteed community. The platform integrates the crowdfunding campaign with all subsequent stages of product development and sale, offering the possibility of selling on the portal.
– De Revolutione, launched in 2012. Hosts both crowdfunding campaigns and petitions and signature gathering for common interest projects and initiatives.

TYPES OF COLLECTIVE FINANCING:

• Collective Reward Crowdfunding (Reward Crowdfunding): the most widespread in Italy and around the world.
  This model led to the adoption of pre-selling. That is, the promoter’s choice to turn to crowds for financial support to design and produce a new good or service.
  Supporters contribute to its implementation financially in exchange for a reward. Often it is the product itself, offered at a lower price than the future launch price.Platforms offer two or more contribution choices that follow two patterns:

All-or-nothing: provides that only upon reaching the collection goal that the planner has set, the donated funds are transferred to him or her and the associated success fee is paid to the platform.

Keep-it-all: provides for the effective collection of what the designer collects even if the established economic goal is not met.
In this case, the percentage paid to the platform is higher than in the all-or-nothing case.

• Collective Donation Crowdfunding (Donation Crowdfunding): the initiator launches the fundraising campaign for the purpose of carrying out a project of a social, cultural or environmental nature.
  Supporters contribute to it by donating to a cause they believe in. This model is most widely used by entities and organizations.
• Civic Crowdfunding (Civic Crowdfunding): employed by institutional entities (municipalities, provincial governments, and municipalities) to finance public works and urban fabric restoration activities;
• Financing in the form of venture capital (Equity Crowdfunding): allows unlisted companies to raise financial resources from the public against equity shares.
  The entrepreneur launches the project funding collection on the online platform and sets the monetary goal to be reached to implement it. The supporter invests his or her savings in the project by becoming a partner in the company and obtaining any dividends and capital gains.
  This formula is considered the most suitable for innovative start-ups and SMEs that turn to the market to obtain the capital they need to start their business.
• Collective loan financing (Lending Crowdfunding): individuals and legal entities may decide to lend funds to each other, at a higher or lower interest rate, for the purpose of carrying out a project.
  This form of financing led to the emergence of Peer to Peer Lending (or P2P Lending).
  It is a model that allows savers to donate their monetary resources to entrepreneurs, replacing traditional methods such as banks.

• Hybrid models of collective funding : hybrid models of reward and donation.

Data show that in 2014 the most widely used crowdfunding models were as follows:

1. lending-based confirms its leadership with $11.08 billion raised (accounting for 68.4 percent of total collections);
2. donation-based with $1.94 billion;
3. reward-based with 1.33 billion (92 percent of which is in the United States alone, where major platforms such as Kickstarter, Indiegogo and GoFundMe reside);
4. equity-based with $1.11 billion (including $787 million in North America alone and $177 million in Europe).

KICKSTARTER

U.S. collective funding website for creative projects, launched in 2009 by Perry Chen, Yancey Strickler and Charles Adler.
Through this reward-based model, different types of businesses have been funded, including independent films, video games, music, theater performances, comic books, journalism, and food-related businesses.

The peculiarity of Kickstarter is the inability of backers to receive money directly.
If you support the project, you can get various kinds of rewards such as:
-A personal letter of thanks;
–customized gadgets;
-testing a new product;
-personalized shirts, etc.

How does it work?

• presentation with the help of pictures, videos, demonstrating the purpose and characteristics of the project;
• Facilitates the collection of monetary resources from the general public;
• project creators set a deadline and a minimum amount of funds to be achieved;
• If the minimum is not reached, funds are not collected (provision point mechanism);
• donor money is collected through Amazon Payments;
• a project can be funded from anywhere in the world.
  It can be opened only by persons residing in Italy or the United States who hold a regular address, bank account, ID and credit card from that country.
• Kickstarter earns 5% of funds raised and Amazon charges an additional 3%-5% of the total
• Kickstarter does not claim any ownership rights to the project
• Uploaded projects and content cannot be changed or removed from the site;

Kickstarter data

• 2010: 3,910 successful projects and $27,638,318 committed;
• 2011: 11,836 successful projects and $99,344,381 committed;
• August 2012: 68,224 projects launched (including 3,772 ongoing): 44% successful. Completed projects have raised $275 million.
• 2015: $2 billion invested by 9.5 million people worldwide.

Categories

Authors assign their projects to one of thirteen categories and thirty-six sub-categories.
The categories are: Food, Art, Dance, Design, Film and Video, Photography, Comics, Games, Fashion, Music, Publishing, Theater, and Technology.

Guidelines

Kickstarter has identified three guidelines for all project authors to follow:

1. authors can only fund projects;
2. projects must hit one of the site’s thirteen creative categories;
3. creators must avoid prohibited uses of the site, including charity and campaigning.

www.kickstarter.com

PRODUCTIONS FROM BELOW

Produzioni dal Basso is the first crowdfunding platform established in Italy in 2005.
With its simplicity and transparency, it provides a space for all those who want to propose their own project.
The model is reward/donation and collects projects from each area of interest (generalist).
In addition to the possibility of viewing all projects, Produzioni dal Basso presents Networks: an exclusive service dedicated to associations, companies, public entities and all communities that want to select crowdfunding projects in a unique and personalized way.

www.produzionidalbasso.com

VENTURE CAPITAL

Venture capital, or venture capital fund, translatable to venture capital, is a form of high-risk investment.
This is a form of alternative finance that start-ups turn to.
People who establish or manage a venture capital fund are called venture capitalists.
Such a fund may be private, public or mixed.

Venture capitalists must raise capital, turning primarily to institutional funds such as:

-banking foundations;
-the social security agencies;
-Territorial public bodies;
-insurance;
-banks.

When they invest, they acquire shares in the company and help start-ups at the operational level.
They can provide managerial and technical expertise or wait until the business grows to make its investment exit.
Venture capitalists require presence on the company’s board.

The three aspects that lead venture capital to investment are:

1. solid team;
2. broad target market;
3. product/service that has a potential competitive advantage.

Venture capital consists of:

• Limited Partners, institutional investors plus any family offices, holding companies, sovereign wealth funds, very wealthy individuals, who are the ones putting up the money.
• General Partners, individuals who manage the fund itself.

BUSINESS ANGEL

A business angel, or informal venture capitalist, is an individual who becomes passionate about a startup.
He finances it with his own resources and helps it by bringing his own experience, knowledge and contacts in addition to capital.

• Any person who has the means can become a business angel.
• Former business owner. Working manager who has a network of knowledge, solid management skills and has a desire to acquire a stake in companies with high development potential;
• Can assist in the drafting and development of the business plan. Acting as a financial intermediary. Accompanying the entrepreneur in his decisions;
• can organize into local networks or B.A.N. (Business Angels Network). These allow for more direct encounters with entrepreneurs seeking capital and managerial skills;
• Intervenes in the early stage (early stages of enterprise life).
  It can invest from as little as 5-10 thousand euros up to 100-200 thousand euros.
  Financing by the business angel involves the sale of shares in the company.
• Multiple business angels can carry out financing as a group (syndication). In this way, they can spread the risk, each investing a small portion.

Both individuals such as Business Angels and entities and organizations such as:

-chambers of commerce;
-industry associations;
-banks;
-the companies for employment;
-the firms of lawyers and accountants, etc.

BUSINESS ANGEL DATA IN ITALY

Year 2014, data estimated by IBAN: 46 million invested in 135 deals (out of a sample of 279 angels responding to the survey).
The sectors that have benefited most from the funding are ICT, followed by Advanced Tertiary Sector and Trade and Distribution.
It has enabled the creation of more than 180 new jobs in startups, mainly in the North Central.

It is important to refer to different associations to find Angels:

• IBAN (Italian Business Angel Network): http://www.iban.it/it/attivita
  This is the first association established in Italy to spread the culture of angel investing.
  This organization aims to develop and coordinate venture capital investment activity in Italy and Europe by Business Angels. Promotes their recognition and organization in B.A.N. and encourage the meeting of Business Angels, entrepreneurs and companies.
• IAG (Italian Angels for Growth): http://www.italianangels.net/
  One of the largest networks of Italian business angels. Composed of 129 members from top positions in business, finance, industry and the professions.
  Investments by IAG member business angels take place mostly as a group.
  They also reach high figures, from 250,000-1,000,000 euros, by participating in early stage financing rounds in digital, biomedical, electronic and technology companies.
• Turin Investors’ Club: http://www.clubdeglinvestitori.it/en/
  Established in 2008, it has 100 members. It makes investments between 200 and 500 thousand euros, in all kinds of fields.
• Keepers of Success: http://custodidisuccesso.it/
  They are geared toward seed-stage investments in generalist startups, not referring to niche markets, with a focus on the mechanical engineering, ITC, food, biotechnology and health care sectors.
• Angel Network Digital Magics: http://www.digitalmagics.com
  Incubator of innovative and digital start-ups that has established relationships over time with business angels, venture capital and private equity funds, and Italian and international industrial groups.

The Digital Magics model is unique in Italy and is based on:
– A team that identifies, designs, launches and develops new initiatives.
Provides start-ups with mentorship, strategic, administrative, technology and communication/marketing services.
Provides business management support that can accelerate the growth process of the enterprise;
-Close collaboration with private investors, institutional funds and partner companies, which financially and industrially support startups.

Digital Magics designs and develops Open Innovation programs to support Italian companies in their internal innovation process. Offers services of:

– information, strategic consulting and training for corporate top management aimed at digital innovation;
– support for business investment in digital, such as scenario analysis, talent and technology scouting, and support for corporate venture capital programs;
– address for the realization of product innovations, processes and innovative technological applications made by start-ups.

• We are Members: https://siamosoci.com/
  It has been a key player in the world of start-ups in Italy since 2011, thanks to solutions that bring individuals closer to innovative businesses.
  The Siamo Soci community has more than 15,000 users, including more than 2,000 profiled as business angels and more than 3,500 who have accredited their own start-up. We are Members Allow:
  – consultation of descriptions and navigation between project campaigns by business angels;
  – visibility of campaigns by startups for the purpose of finding new supporters;
  – the opportunity for startups to tell the rest of the community about the company’s development plans and services or products.
• Digital Club: http://clubdigitale.it/
  It aims to contribute to the growth of digital in Italy by providing the best start-ups in the area with the capital they need for business development.
• Waba Capital: http://wabacapital.com/
  The aim is to create a solid network of investors with an interest in innovation and the made-in-Italy industry.
  Five types of innovation sought (Augmented Reality, 3D and Robotics, Nanotechnology, Internet of Things and Big Data).
  Six major sectors of interest (Consumer Goods, Healthcare & Wearable, Travel & Tourism, Food & Beverage, Fashion & Luxury, and Media & Entertainment).

by Mara Mazzoli