Crowdfunding: How Startups Can Raise Money from the Public

Ayaulym Ayaganova, city — Astana, financier, co-founder and CEO of Acvee Finance, board member of TechnoWomen, head of the technical women’s entrepreneurship group, @ayaganova_ayaulym

Imagine this situation: you have a great startup idea, but no money to implement it. You go to a bank, but they require high collateral and offer loans with huge interest rates. What if you could get money from people who are interested in your project?

What is crowdfunding

Crowdfunding is a way to raise money to implement your idea from a large number of people through special online platforms. These can be ordinary citizens willing to invest small amounts in exchange for a share in the project or simply as help. This method has become popular worldwide, including in Central Asian countries. There are several types of crowdfunding:

— reward-based: donors receive rewards for their contributions

— equity-based: investors receive a share in the company

— debt-based: money is provided as loans, which are then repaid with interest

— donation-based: donors do not receive material rewards, but only moral satisfaction from supporting the project.

Crowdinvesting involves financial compensation that the investor receives in exchange for their financial assistance to a startup or business. Thus, ordinary people in a group ranging from two to infinity can quickly and effectively finance a project, thereby providing a better alternative to bank and state funding. Returns can range from 20 to 30% per annum, which is significantly higher than the yield on bank deposits or stock investments, which are associated with greater risks.

A third party — the administrator of the crowdinvesting company — helps invest in such deals. This company takes on the obligation to analyze the business for profitability and compliance with various factors. The administrator accompanies and controls payments until the end of the entire deal, reducing risks for investors.

Researchers from New Mexico State University and Aalto University link the success of crowdinvesting campaigns to the number of investors, funding targets, campaign duration, and open financial information. The World Bank projected the crowdfunding market volume to reach $800 billion by 2030, exceeding the venture capital market.

Examples of crowdfunding platforms:

— Kickstarter: one of the most well-known platforms used for reward-based crowdfunding

— Indiegogo: another major platform offering flexible campaign conditions

— Crowdcube: a platform for equity-based crowdfunding, popular in Europe.

Crowdfunding in Central Asia

Crowdfunding is gradually penetrating Central Asian countries. Let’s look at a few examples from Kazakhstan.

— Ikapitalist: a Kazakhstani platform specializing in providing loans and bonds. Many local businesses have already successfully raised funds on this platform

— Investroom: also based on providing loans for business from many people

— Acvee Finance: a company engaged in factoring deals, funded also by collective investments aimed at capital management.

Crowdfunding opens new horizons for startups in Central Asia, offering access to capital and the opportunity to test their ideas in the market. The number of such companies indicates that this approach is effective and has potential for further development in the region. Startups can use international platforms or local analogs to raise funds and develop their projects.

Why crowdfunding is cool

— accessibility: you can raise funds even if you don’t have wealthy investors or connections

— idea validation: if your idea is truly good, people will vote for it with small contributions

— marketing: a crowdfunding campaign is excellent advertising. Your project will be known to 1000 people

— community support: you gain a base of loyal customers and supporters ready to support you in the future.

Why banks are not suitable for startups

— high interest rates: bank loans are too expensive

— lack of collateral: startups often do not have sufficient assets for collateral.

Modern market conditions and uncertainty require the development and application of new financial instruments, such as crowdfunding, to support startups and small and medium-sized enterprises (SMEs). This is especially relevant in conditions where bank lending is shrinking due to high interest rates and overdue debt. The need to reduce the dependence of startups and SMEs on bank borrowing by diversifying funding sources, particularly through non-bank instruments, is becoming increasingly obvious. If you have an idea and are ready to work on its implementation, crowdfunding can become your key to success. So don’t be afraid to dream and bring your ideas to life with the help of crowd funding!