Crowdfunding - IELTS Listening Answers & Explanations

Lecturer: Good morning, everyone. Today we're continuing our look at funding opportunities for small start-up businesses. The emergence of social media has given companies the ability to connect with fans and potential customers directly. On the back of the growth in social media, a model of raising finance has emerged known as crowdfunding. This revolutionary way of raising finance began with micro-lending in the nineties. More recently an equity-based model has emerged that allows people to invest directly in a new company. We're going to examine this in more detail later, but let's turn first to a third model, which I'll term a fan-based model.

With this model of crowdfunding, individuals are encouraged to give an amount of money to support the launch of a project or initiative without the promise of any financial return. Instead, there's a reward for donating. This contrasts with the micro-lending model, which would require a return on investment, and the equity-based scheme, which may offer shares. Crowdfunding portals or websites allow the business concerned to present the initiative along with the financial target required. There's a fixed time limit for fundraising and if the target amount is reached, all donations are paid to the company or individual. Whether it's an author planning to write a new book, an independent film company looking to make a new film, or a technology company with an idea for an app, the person or company needing funding would turn to its fan base for support. This is managed through one of the many crowdfunding online portals that have emerged.

Of course, a fan or supporter of a particular initiative is likely to give money anyway. But donation-based crowdfunding will often make donating even more attractive by offering a rewards-based incentive scheme. Let's take a film company, for example, that needs funding for a new film. For a small set donation, the donor might be offered a free ticket to the premiere or a DVD of the film. A larger set donation might be rewarded by the chance to attend a launch event when the film goes live. Those people who make bigger donations could even be offered the chance to meet the cast of the film, whilst the highest level donation could see the person's name mentioned in the film credits.

For companies that already have a significant fan base, crowdfunding offers a fantastic opportunity to raise money quickly from a large number of people, each of whom donates just a small amount of money. Compare this to the time and effort that would be needed to sell your idea to investors or your bank manager, particularly in an age when raising finance can be difficult. The company may also have links with partner companies or organisations that run fundraising events. In this case, you can significantly increase participation by working with these organisations to promote your crowdfunding project. Another significant advantage is that you can reach out to your fan base for feedback on the project while it's being developed, thus making the final product more appealing. Crowdfunding enables you to raise awareness of the product at an early stage, thus increasing the potential for sales. With so many people behind you, it can also act as a great incentive to get the best possible product out on time and on budget.

However, there are disadvantages to bear in mind. The model can be described as 'all or nothing'. If you don't reach the monetary target required in the agreed time, all promises of donations are cancelled and no money is paid, leaving you back at square one. Should this happen, or still worse, you receive the funding but are unable to come up with the product, not only will your fans end up disappointed but the portal will record the fact that you failed to reach your target or that the initiative failed. Fulfilling all the pledges that you've made to people can also be very time-consuming. For example, remembering to send out copies of books or free cinema tickets can sometimes be forgotten in the excitement and frenzy of launching your product. People sometimes forget to factor in the cost of rewards when calculating profit margins, but these can be significant. And finally, if you have a small fan base, for example you're a new company or have a small social media footprint, raising awareness of your initiative will be challenging.

These drawbacks aside, donation-based crowdfunding is a wonderful opportunity for individuals or small start-ups to raise funds for that exciting new project whilst reaching out and connecting to the people who are most likely to support and promote your work for you.