Published on August 24th, 2014 | by Arnout


The New Ways of Financing

The Internet allows for New ways of financing In the old model of financing usually presented someone with the money to fund an endeavour with no certainty of success. That implies high risk of repayment and because of that only a limited level of financing but based on a high rate of interest to ensure that the lender makes up for potential losses. In this model the lender makes huge amounts of profit because they only finance projects / businesses with a high probability of success. We all know where that got us so not much need to dive in to this much further. Banks have been confronted with a new model of financing the last couple years: crowdfunding (Zack Brisson has written a nice explanation on They have acknowledged this potentially huge competitor but they haven’t yet found a way to answer it. This might not even be necessary as the banking model allows for many advantages that both consumers and companies want to use to have their financials taken care of.

But crowdfunding offers something new that the users of kickstarter and other platforms have smartly adopted. The investment they ask immediately transfers into a sold product. I have been looking into what actually happens in these investment schemes and what makes them work. And all in all it is not that complex yet it is very effective.

It requires the comprehension of some ideas of the Internet economy and a little about banking.

  • Kickstarter is based on a very small project success rate, they offer a platform to both ideas and funders, they have the funders decide which projects will succeed. That’s the opposite of the banks who base their model on a very high success rate and have their own experts decide which projects have the highest probability of success.
  • While banks assume that the amount of ideas they finance is very limited and most of have already proven their success. Kickstarter assumes that the ideas that can actually launch are a success before they launch.
  • Banks have access to huge amounts of funding based on their banking licenses and their risk models. Kickstarter has access to every internet user with their own limited amount of funds.

The big difference here is the way both models look at the market, but in a way they complement each other, for now.

In an age where everybody can find anything and everything can find it’s way to anybody (read Clay Shirky’sHere Comes Everybody) in a extremely short amount of time, crowdfunding and possibly funding crowds might overrun the banking model entirely. As Jeff Jarvis writes in “What Would Google Do?” ” We live in a time of abundance”. Banks are from a time of scarcity which can be seen in the way they look at financing. The use a limited amount of funds to help enable a limited amount of projects that have a limited rate of repayment. Being in banking myself I can assure you this way of doing business works, there is nothing wrong with it, it does however limit access to funding to the projects banks deem successful and might prevent other things, that consumers like you and I would like to see in the market, ever seeing the light of day.

On the other hand there is crowdfunding where you can help enable the ideas you would like to see in the world, something more Ghandi than anything else but creating stuff yourself. Yet crowdfunding requires you to pay before you even know what you want to be realised will ever come to your doorstep. I write doorstep because usually you buy the product by investing. This concept actually is an investment risk, it seems small but it actually is quite big, the amount you invest is small making the your loss in case the idea is no success: Loss Given Default (LGD) in banking terms, very small too. And this is in my opinion where banking and crowdfunding can come together.

Banks want to see proof of the success of an idea or company before they finance it, of course they do because they are funding it with your savings and they also told you, you will get your savings back with interest. They used to define the probability of the success based on 3 to 5 years of company figures (Profit & loss accounts, balance sheets etc). But in a time where the Time to Market (ttm) is becoming shorter every month companies can’t wait that long.

Crowdfunding offers a new way of predicting a success of the loan given, the crowd has already bought the product. And to add something else, by financing a project that is already funded for the amount the bank will finance a bank can do something else, accelerate the return by financing the project upfront based on the pledges of the investors that are linked to the already sold products that might not rely on the technological success at all. Here’s how that can work:

Let’s say electric monocycle Ewheel costs $5000 they put up a crowdfunding scheme, if you want to invest in that you can jump in at several levels:

  • $50 to get a cap;
  • $100 to get a cap and t-shirt;
  • opt-in for a $1000 you get the cap, the t-shirt, a helmet, and jacket, and;
  • if you invest $7500 you get a cap, a t-shirt, a helmet, a jacket and an Ewheel.

We could add more options but what basically will happen, most people will invest in the lower end because of the financial risk and fewer will go into the high end. A cap or t-shirt is to that expensive to make and is proven technology, it can even be completely outsourced.

An investor probably only pas $10 for each so on the $100 dollar scheme there is $80 invested and $20 is costs of the perk. If the company actually sells the cap and shirt for $20 on its own website there is a 10$ margin on the product that will be used to create the cycle.

This is where the risk can be split.

  • Banks could finance the $40 dollars Ewheel gets for the perks based on the assets. The bank knows the perks are sold so they finance the production and delivery freeing up the profit for Ewheel to use. The risk for the investor will be mostly reputation in case the product flunks (and might even still to wear the Ewheel logo after that anyway, just like “Firefly”  is insanely cool in the Sci-Fi community.
  • On any successfully pledged funding project they could use their risk models to finance the rest of funding required upfront. They would do that using the invested funds the crowd has deposited as a lever to fund using inter banking funding and on top of that returning the investors a rate on that.
  • The remaining risk is whether the entrepreneurs can deliver, this is what banks are good at, using their advanced monitoring of finances they can warn the entrepreneurs of irregularities in project progress the inventors might not have seen. They could use their business skills to help the engineer that just loves the Ewheel to become a successful business. So the operational investment risk can be mitigated aswell.

The risk of investing can be leveraged based on the success of crowdfunding and basically the awakened demand for and of any project combined with the merits and skills of the entrepreneur instead of his financial track record.

There must still be tons of opportunity here and I might only have touched on an idea that is already in the heads of other people. I also believe that finding a new way of financing will not be as simple as I have written in my blogpost. Yet there must be ample thought on this and I would like to encourage an open discussion. Anyone one who like to fill in some of the blanks, please use the comments below.

(image courtesy of



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About the Author

Working in Business Development at ABN AMRO offers me a wide view of markets. In combination with my broad interests this results in diverse articles. On the blog you will find stuff on tech, on social issues but most about what I like to share out of my life, lots of it is of course related to the life lessons I learned in my practice of Wing Tjun.

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