Crowdfunding is much more than just funding for startups, entrepreneurs or SMEs. It is also getting professional business advice on how to build and consolidate a project and leveraging an ample business network and mentorship. Crowdfunding was created to open private markets to ordinary investors. The collective funding model is relatively simple but not simplistic; entrepreneurs make their ideas public and if an investor (non-accredited investor) considers the idea valuable enough, an economic contribution is placed. Crowdfunding models help understand how to prepare and present their financial, commercial, legal and operational information in a manner that the investors prefer. There are two types of collective financing: the nonfinancial crowdfunding, donations consisting of pure (without anything in return) or rewards; and financial, which raises capital in exchange for interests (i.e. through a loan) or a stake in the company (i.e. giving company shares to the investor). Equity crowdfunding accumulates money from a group of investors via the internet, using social media.
Crowdfunding models help understand how to prepare and present their financial, commercial, legal and operational information in a manner that the investors prefer.
Crowdfunding is a channel of mobilizing and engaging a community, may provide as a vehicle for testing projects to enable sustainable funding, aligning profit with impact to service finance operations of projects that may lead to greater local and global engagement. The power of collectivity is undeniable, anyone can present their initiatives over the website of the company, the idea is reviewed based on the idea, whether it solves a problem or not, the value proposition, value added, business opportunity, barriers to entry, the entrepreneur profile, amongst others. There is considerable need for funding between entrepreneurs and Small and Medium Enterprises (SMEs) in Mexico. In that sense, crowdfunding has the ability to attack such financing needs and promote the development of the entrepreneurial ecosystem. Obtaining resources is quite challenging and difficult for an entrepreneur or a startup, especially at the present time where most of the funding is placed through “traditional finance”; approach banks, get someone to listen and trust you for an investment to expand your capital and potentiate organic growth is easier said than done. Access to capital is the weakest link between entrepreneurs and their projects. There is a lot of talent and good ideas in Mexico, but the gap between the startups that get funding and the ones that not, is substantial.
The Internet brings a vast array of possibilities, with innovative instruments such as crowdfunding which is beginning to determine the way financing is done in Mexico for entrepreneurs and startups; Mexico has a growing population using internet for commercial purposes. Crowdfunding offers innovative investment projects, however, it implies a degree of risk for the investor which can be mitigated by a suitable and well-structured online platform. It is a concern for all investors to seek investment opportunities with high yields, assess all possible contingencies, risk valuation, and have appropriate control mechanisms. Crowdfunding is still not regulated by the National Banking and Securities Commission (CNBV); the structure can be understood as a contract between parties and on the connection between the lender and the entrepreneur, but the funding is guaranteed by administrative collection firms amidst with formal compliance with our financial system.
The investment outlook for Mexican entrepreneurs in the coming years is very favorable, while crowdfunding is maturing to democratize investment projects in Mexico, entrepreneurs now have an incentive to launch startups with feasible economic growth and social impact. To do so, a consolidated legal framework that regulates this activity and provides greater confidence is essential. Faced with the challenge of regulating new financing schemes such as crowdfunding, an independent association was created, the Mexican Association of Crowdfunding (AMC), which aims to boost confidence in the country, through self-regulation. The structural reforms, particularly the financial reform, will bring incentives in the tax scheme for Mexican investors to invest more easily in crowdfunding comprising various sectors. Structural reforms will facilitate in great extent the task of the entrepreneur, as they will reduce the cost of inputs, reach better and broader credit conditions, and increased access to information technologies – internet penetration through e-commerce.
The challenge is to increasingly promote the participation of accredited and non-accredited investors on these sites, as they have proven to be an excellent choice for low-income entrepreneurs that have no other funding options and a viable investment opportunity. What Mexico is really waiting for is an entirely new type of equity crowdfunding service that will grant a much far-reaching spectrum of public, not only accredited investors, to own a stake in a new enterprise. It is undeniable that the crowdfunding process on the internet is a huge triumph, the process of raising capital can now be achieved more efficiently as the scheme becomes more popular and the public who invest grows into a more diversified ecosystem.