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Is crowdfunding the best option for your savings ?

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Several crowdfunding platforms have emerged in the last months in Belgium. One of them (MyFirstCompany), although very promising, already ceased operations earlier this year. The legal problem mentioned on their website seems not to have impeded another platform (Look&Fin) to start collecting money from individuals to fund local SME projects. Look&Fin successfully funded several projects, one of them being a new salespoint for the Mamma Roma chain.

Look&Fin proposes several ways to investors for getting their money back (with interest). One of them, which was in use for Mamma Roma, is a given percentage of the revenues generated by the company which borrowed the money. Unlike coupons which give a known interest this method adds a certain level of uncertainty which I’d like to discuss here.

Look&Fin adopts a special model to pay investors. This model is one of three main models that I’m explaining below.

Get paid in kind

Kickstarter, the “original” and most famous crowdfunding platform works this way. When you invest your real money in a project, you get something tangible back. If the project gets funded what you’ll get is actually a special deal of the actual material being funded with your money. It can be a book, a lithograph, an art print, an innovative technological equipment, you name it.

I like this way of funding and supporting projects because it involves you in the very project of the company. This involvement is not only a financial involvement; it is in first line an emotional involvement. People invest and support projects because they are excited by the product and want to get one exemplar for them. In other words WYIIIWYG: “What You Invest In Is What You Get”.

Get paid in shares

This model of crowdfunding had been adopted by the late MyFirstCompany which created the buzz in 2012 and benefited strong (and merited) support from the Brussels Region. The model was simple and consisted in giving investors a certain number of shares in the NEW company. The word “NEW” is important. All projects presented on MyFirstCompany were subject to the founding of new firms.

A few projects were funded this way but apparently there were legal issues and MyFirstCompany founders decided to stop their activities (at least for the moment). Like KickStarter this model involved the investors who became part of the adventure and got the right, as the website mentions, to attend meetings of shareholders.

Get paid back in real money

Look&Fin proposes yet another alternative to the models above. The act of funding is seen as a financial instrument. You own the debt of the company and have the right to get interests for your money. The interest rates seem to be really attractive compared to the mere 1-2% your savings account can yield. Moreover Look&fin’s business model takes advantage of the current trend and willingness to invest money in the “real economy”.

 

My Take

Let’s first quickly come back on the “invest in the real economy” trend. I don’t know who started it but this for me it makes no sense. It makes no sense because “investing in the real economy” is already what banks do. When you lend them your money, banks must lend it back to generate revenues and profits. Whom do they lend that money back? to consumers of course but also and foremost to companies. The “invest in the real economy” motto should therefore be relabeled “invest in the local economy”.

What I liked with MyFirstCompany and with KickStarter is that your money was not invested on the basis of an expected interest but implied an emotional link with the business. With Look&Fin this emotional link somewhat disappears to me. The debt will be paid back with a certain interest rate and my guess is that investors will decide on the opportunity to invest based on the expected interest rate. It becomes a pure financial decision. Worse, what I think is that the model proposed by Look&Fin, because it is based on paying a share of the revenues back, is more adventurous.

Imagine you lend your money to a given company in a sector that is known for not declaring all revenues (in other words where making black money is a widespread practice). Imagine also that the company that borrows your money has no transparent governance in place and that you have no mean to actually control what they do. Can you please tell me how you’ll ever be sure to get that expected share of the revenues? Look&Fin allows for extending the duration to reimburse the debt if revenues are not sufficient; you may say I’m exaggerating but I dislike risk by nature and I prefer to keep control. In Look&Fin’s system a company could very well hide revenues (Look&Fin’s control are based on the VAT declarations) and increase the reimbursement period which will automatically decrease the Net Present Value (NPV) of your investment.

Last but not least (this is however not specific to Look&Fin) the success of a retail concept is highly dependent on the localization of the store which I didn’t see analyzed. The financial analysis is past on historic information (last balance sheets) although very specific KPI’s should be measured: capitation zone, pedestrian flows and the like.

 

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Author: Pierre-Nicolas Schwab

Dr. Pierre-Nicolas Schwab is the founder of IntoTheMinds. He specializes in e-commerce, retail and logistics. He is also a research fellow in the marketing department of the Free University of Brussels and acts as a coach for several startups and public organizations. He holds a PhD in Marketing, a MBA in Finance, and a MSc in Chemistry. He can be contacted by email, Linkedin or by phone (+32 486 42 79 42)

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