Why we need to change the business model of crowdfunding

We now know that crowdfunding is gradually becoming part of our habits and will become a reflex. On the one hand, the French are increasingly sensitive to the meaning they give to their savings. On the other hand, project leaders (associations, entrepreneurs, artists, athletes, etc.) are looking for new, simple, accessible and little sought-after means to meet their financing needs. Today, obtaining a loan from banks or seducing Business Angels is often accompanied by an obstacle course.

The figures are there: the amounts raised in France via crowdfunding were multiplied by 10 between 2011 (7.9 million euros) and 2013 (78.3 million euros)[1], and hope for them are highly encouraged. Beyond the numbers, crowdfunding is becoming part of everyone’s habits and reflexes: the collaborative economy is thus becoming a real alternative to the classic model. This new mode of “crowd” funding raises the following question: has the participatory economic model taken the measure of its success and will it be able to adapt?

On which business model are crowdfunding and the collaborative economy integrated?

Most collaborative economy companies and start-ups are built on the same sources of revenue: transaction fees collected from their users. Airbnb, the peer-to-peer property rental giant, takes service fees of between 9 and 15%, split by landlord and tenant. Blablacar, the leading carpooling site in Europe, charges between 5% and 15% of the amount of the reservation to cover connection costs and VAT. Finally, with regard to crowdfunding, KissKissBankBank, Kickstarter, or even Ulule, smoke 8% commission on each successful fundraiser.

This model has undoubtedly proven itself by popularizing the collaborative economy, but it also has its limits. Despite a real boom, many forms of crowdfunding platform, even after several years of existence, are still raising funds without reaching their break-even point; we can then wonder if the economic model of these platforms is sustainable. Above all, we can wonder if charging a connection fee is the only model that can be envisaged in this sector, and if this is in line with the collaborative philosophy?

The philosophy of the sharing economy

Some crowdfunding sites take up to 800 euros in commission fees on a fundraising of 10,000 euros in donations, simply because they have connected people with similar interests. Or, intermediation at less value today. Our world is hyper-connected, 85% of French people are registered on at least one social network; meeting virtually has become natural and above all, free!

Therefore, how to justify such commissions on crowdfunding sites? The project selection service? Probably not ; in June, Kickstarter announced a relaxation of its rules, not to allow small projects to be financed, but because all projects are good to take even when the economic model does not work.

The personalized consulting service for project leaders? No more ; today, the platforms are satisfied with an FAQ or a guide, the advice is therefore generic and the project leaders are alone with the tool. The risk management department? Even less ; we count, in fact, on the good faith of project promoters as to the use of donations, and this will no doubt also be the case for loans and equity investments.

A lack of transparency

Certainly, this gives life to great projects that would never have seen the light of day without crowdfunding. Certainly, the sites we are talking about need to be commendable. But tomorrow, the growing competition between the platforms, the maturity of the players, the opening of crowdfunding to loans and equity investments, will direct the debate not only on the quality of the services offered, on risk management but also on the amount of commissions charged. Indeed, crowdfunding suffers from the asterisk syndrome: they are sorely lacking in transparency and the mention “free” ends up revealing commission rates rather high prices. If the rate is so well hidden – it takes between 5 and 10 minutes to find it – it is probably because the platform does not assume its remuneration model.

Ultimately, the donors take stock. They note that their remuneration does not only serve the cause of an association or the creativity of Steve Jobs of tomorrow, but that it serves above all a profit-making system which has nothing to envy to the traditional banking system. As for investors, they will be particularly attentive to the impact of these transaction costs on their income, and they too know how to do the accounts.

As long as you rethink a centuries-old banking system, don’t make the same mistakes again! On the Web, the time is for mutual aid and sharing, crowdfunding must therefore adapt to the philosophy of those who have made it successful.

How to build a commendable model without transaction fees?

Some, like the German site Covoiturage, rely on advertising revenue; it’s a respectable idea, provided the publicity is not untimely. Shouldn’t we rather be inspired by the site leboncoin.fr? Launched in 2006, it has imposed itself on the French market where many specialized sites (automotive, real estate, etc.) were already installed and above all, an essential generalist player: eBay. This giant whose profitability model was based on insertion fees and commission on the final price, as are today crowdfunding sites.

By allowing owners to put their ads online for free, leboncoin.fr has generated considerable traffic. Classified ads have become a reflex, even a hobby on the Web. It is therefore thanks to this significant traffic that leboncoin.fr has generated an income: of course, there is advertising, but there are above all services intended for professionals and individuals. This model has the advantage of promoting access to the standard classified ad service for the greatest number of people, of being closer to market developments and expectations and, finally, of identifying more simply the services with high added value. to ask users will be willing to pay.

Moreover, the activity which has just been framed in France is called “Conseil en investparticipative”. The reason is simple: the added value of forms of crowdfunding is advice, an essential factor in the success of a project, particularly an entrepreneurial one, and in risk management. It is indeed complicated to create a project, build a business plan, then convince or pitch, when you are neither a professional in your field nor a financier. Similarly, it is sometimes complicated for investors to choose the right projects, measure the risks and value their investments.

Tomorrow, what model for crowdfunding?

A turn must therefore be taken. A fairer remuneration system for crowdfunding advisory platforms must be found. A system in which the project leaders are not amputated by 8% of the funds they have managed to raise. Great successes on the Web, built on remuneration through advertising or the sale of personalized services, give serious food for thought to build a commendable model. Just look at the stakeholders in the crowdfunding market:

  • associations, which struggle to rally and retain donors,
  • project leaders, who sometimes need several hundred thousand euros to start or develop their activity,
  • artists or athletes, most of whom are foreign to the world of finance, investors, unaccustomed to this method of investment,
  • the general public, who need to be reassured about the risks taken.

All need advice, expertise and professionalism. As for the market, it also needs it to strengthen its recovery and gain the confidence of as many people as possible.

Nicolas Gautier & Hervé Charroux, founders of Lacourtechelle.

www.lacourtechelle.fr