THE FUTURE OF FINANCE: CROWDFUNDING

Crowdfunding is a new financing model in which large numbers of investors fund a project. The model emerged due to the difficulties experienced by entrepreneurs in obtaining finance following the great financial crisis in 2008 around the world. Based on the collection of the financing needed for a project from a large number of people in small amounts, the model has attracted great attention with its structure that can eliminate geographical borders by the use of the innovations brought by the internet.

Even though crowdfunding is considered for the funding of projects at the pre-seed or seed stage, large projects that we can call scale-up can also be funded today. The value of the global crowdfunding market was USD 13.5 billion as of 2021, and it is estimated to reach USD 28.9 billion in 2028. The transaction volume, which was USD 114 billion in 2020, is expected to reach USD 264 billion in 2027. The average fund per investor was USD 28,656 and the average success rate was 22.4%.

Crowdfunding in Türkiye was regulated by the CMB Communiqué (2019), and upon the amendment made in the Communiqué in 2021, the first licenses began to be obtained. Currently, 11 crowdfunding platforms are active. In 2002, funding of TRY 300 million was reached with 15 thousand investors in 45 projects. There are basically four methods of crowdfunding.

Equity Crowdfunding: It is a method based on giving stocks to investors in return for the funds to be collected by the entrepreneur. In this method, entrepreneurs publish their projects through platforms. As many investors become partners in the project, the advantages and risks of the project spread to the base. The management of the business is in the hands of the entrepreneur. In angel investor and venture capital partnerships, investors are frequently involved in the management as they receive a high share of the project. Equity crowdfunding without such intervention is more attractive to the entrepreneur. The aim of the investors who are partners in the project is to get a share of the profit, gain voting rights and gain value increase. Even though investments are made in risky but high-yielding projects, investors trust the system since they are protected by legislation.

Debt Crowdfunding: It refers to the collection of money from the public in order to raise the funds needed by a project or venture company in exchange for debt instruments. In the New Communiqué, this method is defined as “debt instruments, securities sold by entrepreneurs or venture companies through platforms, based on the principle of repaying the nominal value to the investor in instalments until the maturity date, where the funded company has the title of the debtor”

There are basically four methods of crowdfunding. Namely equity, debt, rewardsbased, and donation-based crowdfunding

Rewards-Based Crowdfunding: This is the most used method of crowdfunding. It can be split into two based on reward or pre-demand. In rewards-based methods, symbolic rewards are given to those who contribute to the campaign. In the pre-demand method, the participants of the campaign are given the product that the entrepreneur will offer to the market free of charge or the right to buy them below the market price. “Kickstarter” and “Indiegogo” in the USA are the most well-known rewards-based platforms.

Donation-Based Crowdfunding: It is a funding method that has no financial compensation and is collected from supporters as grants. People support projects that they think will benefit the society.

Fonangels.com, where I am a member of the Investment Committee, aims to bring innovative projects to our lands locally and to support “Turkish origin” brands globally. In 2022, the largest crowdfunding in Türkiye at once was realized through fonangels.com with approximately TRY 19 million and 1,567 investors.

In equity crowdfunding, the creation of a secondary market where share transfers can be made easily is extremely necessary. In the Communiqué, this task was given to Borsa Istanbul. Besides, the creation of a framework rule set in terms of participation finance principles in the crowdfunding system will also contribute to the growth of the system.