False myths about crowdfunding

Online activities have tended to become the subject of false myths, clichés and even conspiracies since the birth and spread of the Web. This tendency has not diminished with the time and familiarity we have become familiar with the Internet nor with the proliferation of online entrepreneurial and commercial activities. False myths about crowdfunding also sprang up like mushrooms in the early years of the development of this phenomenon and are struggling to die. Therefore, some doubts and questions always recur in those approaching this world: in the FAQ article on crowdfunding we answered the most common ones.

The Web, especially for those who started mastering it late, such as Italians, is a place that cannot be seen, where anyone can enter, where almost anyone can do almost anything they want, where it is difficult to control and be in control, so it arouses distrust. In a corner of the collective imagination, the Internet is still a tool for those who cannot make it in "real life." Then if money and economic transactions are involved, both mistrust and stigma are amplified. Translated with DeepL.com (free version)

That is why it is still necessary to write an article to dispel false myths about crowdfunding, more than a decade after the appearance of this tool in our country.

Crowdfunding is for "the little ones"

The first false myth about crowdfunding and perhaps the hardest to die is that it is "a game for children." Out of metaphor, an activity for startups that need to practice before entering the "grown-up" world, which is precluded to them for the time being.

This myth stems from the mistaken belief that crowdfunding is simply an alternative to a bank or investment fund to raise capital. Those who can, i.e., "the big guys," who know how it works and have solid credibility, go to these institutional and/or authoritative, as well as well recognized, entities through procedures known to all and through physical offices with padded chairs. The smaller ones, on the other hand, cannot access this world and have to "settle" for a depowered surrogate like crowdfunding.

All this is false because crowdfunding is an operation of a different nature from mere financing or entry of new capital: it is a marketing operation, which any business can do to acquire new customers, open a new project, relaunch its corporate image, make its way into new niches, gain competitiveness, seize new business opportunities, build a real community and only finally raise capital.

These are useful advantages for everyone, not only for startups or young companies in general. Choosing crowdfunding does not necessarily and only mean being struggling, being inexperienced, having less potential than others, not being "enough," having no alternatives: crowdfunding is a conscious and thoughtful choice as part of a well-defined growth strategy, able to take advantage of all the tools available without bias.

One example of a large company that has realized the potential of crowdfunding is Edison, which has used it to engage local communities in renewable energy production.

Crowdfunding has a high risk of "rip-off"

This is a false myth involving both companies and potential investors.

Online operations always generate this kind of mistrust:

• Who is in charge of money management?
• What if my money disappears?
• Are there any hidden clauses involving additional costs?
• Who knows how much bureaucracy....

Investor protection is not in question: in Italy, financial authorities (specifically Consob and the Bank of Italy) have always been very prudent and careful on issues of transparency and investor rights in equity crowdfunding, and the European Crowdfunding Regulation has increased the protections already in place and extended them to lending crowdfunding as well. Only authorized platforms can provide crowdfunding services and are subject to strict supervision: investments on such platforms are completely safe and all conditions are easily accessible.

The companies themselves must take care to convey to potential investors all the information about how crowdfunding works and is safe, as well as the risks. Any investment, in fact, exposes one to risk.

There are also no dangers for companies if they turn to an authorized crowdfunding platform: the rules are very clear, the management of transactions and money deposits is entrusted to third parties, fees are declared at the beginning of the relationship, and there are no other extra costs, except for agreed and contracted activities. The feeling of "rip-off" very often arises in those companies that started a crowdfunding campaign thinking it was practically free, minus the platform fees: activities, advertising, software and human resources have costs. Knowing how much it costs to do crowdfunding in advance helps avoid these disappointments.

Bureaucracy is there, yes, that is unavoidable. But it is no greater than that required to apply for a bank loan, and the timelines, moreover, are on average much faster. Business plan, offering memorandum and capital increase document, articles of incorporation, and creditworthiness analysis are the documents one has to deal with most often to do crowdfunding.

Crowdfunding is for experienced investors

Many businesses approaching crowdfunding are convinced that they have to go for capital from big financial experts and professional investors or hardened traders.

Actually, crowdfunding is a tool that is accessible to everyone: the safety questionnaire (called MiFID) is the same one that anyone who wants to invest in any other financial instrument has to fill out. So obviously it takes a knowledge base of the mechanisms of investing, especially since risk awareness is important.

But beyond these basics-which are acquired rather quickly-crowdfunding is no more complicated than other types of investments, quite the contrary: crowdfunding platforms offer guided and simplified investment procedures compared to trading portals or bank securities accounts. What's more, these are not investments in abstract financial securities described by numbers and acronyms, but investments in the real economy, in businesses that put their face (as well as their business plan) directly on the proposal page, in tangible and truly knowable projects. This is why we talk about crowd-funding: because we can-and should-target the crowd, not small niches of professional investors. Specifically, the best investors are customers or potential customers.

Doing crowdfunding makes founders lose control of the company

A great classic of false myths about crowdfunding, it particularly concerns the equity type. The concept of opening the company to the entry of many new partners frightens many entrepreneurs, who fear losing their decision-making and directing power, moreover to the benefit of often inexperienced or otherwise nonprofessional investors.

In reality, this problem does not exist: just delve into how an equity crowdfunding campaign is done in practice from a technical and bureaucratic point of view.

The sale of company shares through an equity crowdfunding campaign (but also in general) involves the preliminary definition of the types of shares to be sold:

• Shares associated with both property and administrative rights
• shares associated with property rights only
• "Mixed" shares (e.g., with limited voting rights).

The types of shares should be provided for with special clauses to be included in the company's bylaws, with wide scope for customization according to the needs of the company. However, there are legal limits to be aware of, for example, non-voting shareholders cannot represent more than 50 percent of the share capital.

Another useful statutory clause to protect founder control of the company is the right of drag along, which is the right of the majority shareholder to also sell the shares of minority shareholders on the same terms proposed for his own, without seeking consent.

Not only that, various tools can also be used to facilitate member management, for example, the creation of a corporate vehicle in which to include all members from crowdfunding in order to have a single point of contact. In short, as always, false myths are overcome with study and knowledge. There are also consulting firms that specialize in these issues.

The king of false myths about crowdfunding: crowdfunding means putting a project online

If the false myths listed so far had the effect of keeping businesses from crowdfunding, the one we are about to describe has the opposite effect. Believing that doing crowdfunding means simply putting a nice presentation page of a project online is the misconception that drives those who perhaps shouldn't do it (to find out if you are among them, read the article on how to tell if a project is crowd-suitable).

We should have learned by now: online, being there is not enough. While it is true that crowdfunding platforms are prime showcases, because a company is unlikely to find its own competitor there at exactly the same time as its campaign, this does not invalidate the truth of the assumption just expressed.

Being online with the project page on the crowdfunding platform, an aesthetically appealing landing page, and a few social media posts is not enough to stand out from the amount of material that struggles every day to share users' attention.

The theory of large numbers does not apply so that among the legions of investors looking for opportunities online someone will sooner or later surely choose any crowdfunding campaign (because there is no such category of investors!).

Platforms cannot be counted on to advertise because platforms do not have the role of sponsoring individual campaigns in a targeted way.

Crowdfunding is a job. Overcoming this false myth of easy success and devoting the necessary time and resources to finding investors is the first step to doing it right.