In 2014, the SkyWay string transport project began to attract investment through crowdfunding. From that time on, there has started what professional investors call the sowing stage of investment. It's the most risky and most promising stage for investors, whose number as for 2019 is several hundred thousand.
This article explains what crowdfunding is, what its advantages and disadvantages are, and why the SkyWay project management chose it as a source of funding.
What is crowdfunding?
The history of crowdfunding (a compound English word, that combines the words «crowd» and «funding») is over 300 years. Initially, it was used as a mass fundraiser for large projects, for example, the construction of a monument to the Statue of Liberty was financed through crowdfunding. Sometimes, crowdfunding assumed a deferred reward. Thus, in the 18th century, authors of books and publishing houses advertised future book projects and collected subscriptions to them. The book was published if a sufficient number of subscribers declared their willingness to buy the book when it is released.
Today, crowdfunding is a form of financing projects through the Internet, in which a large number of people invest small amounts.
There are two main types of crowdfunding:
The first one is crowdfunding, based on an award. A person gives money as lending to a producer in the expectation that he will make a product and give it to an investor in the future. For example, in such a way, the crowdfunding project of environmentally friendly watches Pebble Time was financed in 2012, 2015 and 2016.
The second type is crowdinvesting or share crowdfunding. Shareholder crowdfunding is a method of raising funds where a person receives shares or stakes in a company in exchange for his/her money. The main difference of share-based crowdfunding is the potential yield that investors can receive in the future from their assets.
Crowdinvesting is actively used and receives government support in developed countries. In the USA, in April 2012, President Barack Obama signed the JOBS Act (Jumpstart Our Business Startups Act), which allows startups to raise up to $1 million through equity crowdfunding, without filing or registering shares for sale.
Regardless of the type of crowdfunding, most projects that use it have several similarities: a certain funding objective, an estimate of the costs to be invested and a small amount to enter the project.
Advantages and risks of crowdfunding for investors and projects
Besides money, crowdfunding gives projects that use it several non-financial advantages:
- The specific objective, and the openness of the fundraising process, is credible and can enhance the reputation of the company;
- Addressing a wide audience, crowdfunding helps to find investors faster;
- In the process of fundraising through crowdfunding, a manufacturer can collect feedback from users and improve the product for it to be as competitive as possible by the time it enters the market;
- Crowdfunding helps to quickly find people to beta-test the product among investors.
For investors, who decide to choose crowdfunding, there are also several advantages:
- Crowdfunding allows a large number of people to join the project for a small amount. Without crowdfunding, many private investors would not have been able to participate in large projects at early stages of development. Most often, only private investors with large budgets or participants in professional venture capital firms have such an opportunity.
- Today, large venture capital investors and funds are mainly investing in the technology sector of the economy. Crowdfunding gives people the opportunity to invest in promising companies from other industries.
- Through the crowdfunding platform, the investor constantly monitors the process of work on the product and, using the feedback, can influence the final quality of the product in crowdfunding projects.
With all its advantages, crowdfunding remains a method of attracting investments into young businesses and can be risky. For an investor, such risks can be:
- Bankruptcy. The business you invest in may go bankrupt in the first few years, and you will lose your money, or you will only be able to recover some of it;
- In the case of share-based crowdinvesting, the company's shares may simply not grow in the future, and a person may not be able to make any money by selling it or receiving dividends;
- If you invest in a large business, you will not be able to sell your shares or stakes for a long time, as opposed to securities that you could buy on the stock market.
Successful crowdfunding: games and cryptocurrencies
In 2019, the companies attracted more than $ 1 trillion in their projects with the help of crowdfunding. This is comparable to the capitalization of the largest companies in the world.
Most high-budget crowdfunding projects are the ones that use blockchain technology. For example, the EOS project, which from 2017 to 2019 has attracted more than $4 billion without a specific product. For comparison, the world's largest crowdfunding platform Kickstarter in 10 years of its existence has collected 4.4 billion dollars
Volumes of funds raised at Kickstarter by categories from 2009 to 2016
Many people invest in EOS because of the excitement and the promise that its founders, who have managed other well-known blockchain projects, will be able to repeat their success.
The largest crowdfunding project, which is not related to cryptocurrencies, is a computer game Star Citizen.. In 2014, it was listed in the Guinness Book of World Records as the project with the largest crowdfunding support, when more than $40 million was invested in the project. As of 2018, the amount of attracted funds was over $200 million.
As a crowdfunding platform, the company's founder Chris Roberts uses his website, where people receive in-game items for investing in the development of the game.
There are fewer examples of unsuccessful crowdfunding. Most often, such cases refer to small projects, because crowdfunding sites are cautious in choosing companies that attract investments through them, And to maintain their reputation, they don't allow risky projects.
When crowdfunding doesn't work: clones and personal projects
Examples of failures can be combined into two groups.
The first group is clones of some products. New technologies, new projects or products appear, and dozens of imitators immediately follow and try to duplicate them. Most often, the quality of such clones is much lower than the original.
The second group is the use of crowdfunding for personal purposes. For example, a person wants to start a business, or a girl wants to record a music albumn. If you don't have a dedicated fan base, raising funds for personal goals is a very bad idea for crowdfunding,–
although there are funny exceptions For example, in 2014, American Zack Brown launched a crowdfunding project for potato salad. Originally, Brown wanted to raise $10, but eventually, he was donated over $55,000. The reason for his success is that Brown was producing videos during the fundraising process, in which he was parodying serious crowdfunding projects that claimed that their product would change the world. As a result, most of the money he received was donated to charity.
Prospective crowdfunding projects can be identified by several criteria. The two main ones are as follows: the uniqueness and usefulness of the offer. That is, the product should not only copy existing offers, but also bring something new and useful to the user. The usefulness of the proposal is also shown by what a person can get for his investment – a share in a future project or a finished product.
Why has SkyWay chosen crowdfunding?
The history of the SkyWay project started in the USSR, when it was possible to raise funds only by cooperating with the state. This is how the «Zvyozdnuy Mir» [«Star World»] fund was founded in Belarus in 1988, through which some developments of the inventor of the string transport Anatoli Unitsky were to be financed.
With the collapse of the USSR, one had to look for new sources of financing, and Anatoli Unitsky appealed to private investors. The first testing centre for the string transport in the town of Ozyory near Moscow was built in 2001 with the financial support of Governor Alexander Lebed.
In 2013, independent appraisers of Hold Invest Audit Consulting Company estimated the technology of the string transport (intellectual property of Anatoli Unitsky) at $400 867 433 000. This intellectual property became part of the GTI share capital, which was created to implement the SkyWay string transport systems projects around the world.
In 2014, the management of the SkyWay project developed the plan of attracting investments, consisting of 15 stages, by the results of which the project should start bringing profit. From that moment on, the project has been financed by the crowdfunding system.
There are four main reasons why the SkyWay project is developing with the help of crowdfunding to attract investment in the project:
A large sum – a large sum is required to create, test and certify complex transport technology (Approximately $240 million). At the idea stage, large funds and investors are unable to provide such funding.
Minimum bureaucracy – international law requires a minimum of documents to finance projects through crowdfunding;
Feedback and promotion - through crowdfunding platform the company's management can receive feedback from investors on technological innovations, as well as talk about the main achievements of the project;
Independence of management - when using share-based crowdfunding, all control over the project remains with its founder, as opposed to venture capital funds, which claim the right to manage the business.
SkyWay crowdfunding scheme
SkyWay attracts investments through crowdfunding under a convertible loan agreement, meaning that investors can transfer their funds as a loan or take ownership of the company's shares that may generate future revenue. In general, the scheme to attract investment in SkyWay looks like this:
Investors transfer their funds to the crowdfunding platform SWC, which passes on the investors' data to ERRSH, the company holding the shares. Investors funds come to GTI, which uses them for construction and development of the string transport projects. After the funds are transferred to ERRSH, the investor receives security interests. If investors sign the requirement, their data enters the register, and they become co-owners of the SkyWay technology.
You can find more details about this scheme on the page «Investments».
Will SkyWay always use crowdfunding?
Investing in the project now, a person becomes a co-owner of all SkyWay technology and at successful implementation can receive dividends from each implemented string transport project. After the end of the 15th stage, it is planned that the project will become profitable and will refuse to attract investments through crowdfunding.
However, crowdfunding can be used in the future to finance individual targeted projects based on the string technology. According to Anatoli Unitsky, founder of SkyWay, one of the options for financing such projects is crowdfunding based on blockchain technologies.
The initial plan for 2014 assumed that the project would come to profit in December 2017. But due to the fact that the construction location of the SkyWay test site had to be moved from Lithuania to Belarus in 2014, the terms had to be revised. As of December 2019, the 14th stage of the project development is underway.
The initial amount that the SkyWay project planned to attract in 2014 was $450 million. But in connection with the acceleration and optimization of work, the plan was revised several times. So, in 2016, the declared amount decreased to $240 million.
Since 2014, the SkyWay project has attracted several hundred thousand investors through crowdfunding. In five years, five string-rail transport flyovers of different types with a total length of about 4 km, have been built. There has been created 10,000 square meters of production areas, where more than 1000 specialists are working. There have been designed and manufactured 11 principally different models of electric rail vehicles, 4 of which are already certified.
What is there to remember about crowdfunding?
Crowdfunding (a compound English word, that combines the words «crowd» and «funding») is a form of online project financing, in which a large number of people invest small amounts.
For a crowdfunding project to succeed, it must offer a unique and useful product for a wide audience.
Crowdfunding helps companies to increase the credibility of the product and to get quick feedback from users. Crowdfunding allows investors to invest small amounts in large, promising projects.
SkyWay uses crowdfunding because it provides access to a wide audience of investors and allows to attract large amounts of investment.
Investing in the project now, a person becomes a co-owner of all SkyWay technology and with the successful commercial implementation of the project will be able to receive dividends from each completed string transport project.
Andrew Yakomaskin