I thought I might make a video on crowdfunding. It’s a
relatively new and innovative way of financing. It means that instead of going
to one funder to get $1million, you go to 10,000 people to just invest $100.
The internet makes this possible because you can prepare a standard
presentation and maybe conduct a webinar and then you can usually give someone
enough information to make a decision on a hundred bucks.
I actually got into it for a while because it’s a good way
to cut out the middle man. Think about it; all a bank is, is a place for a crowd
of people to save their money, and then the bank manager takes that pool of
money and dishes out loans at a higher interest rate than he pays those who
invest their money.
Where the biggest problem comes in is with the transaction costs? The cost of just transmitting money online is so high that it’s likely to wipe out any normal return, even a high-interest rate return. The only crowdfunding deals that will work are what you might call unicorns. These are usually startups that have a high risk of failure, but if just one out of 10 succeed you make crazy money. It compensates you for any transaction costs, or even the other 9 deals that went sour – Facebook is a good example. The transaction costs then become irrelevant. But anything offering you 5%, 10% or even 15% return is going to be hard hit by the transaction costs. Which rules out secured debt – and I’m particularly partial to secured debt. Those costs are typically 5-10% depending on which platform you go for.
The biggest question is of course, what type of funding does
work and why have I left crowdfunding behind; and that’s what all this is