Donation-Based Crowdfunding: Why Do Corporations Donate and Are There Hidden Benefits

Anyone who has a brilliant idea and is thinking of making it into a business eventually considers crowdfunding – after all, it is the most accessible and surefire way to raise money if you don’t have enough financial backbone. Investment-based crowdfunding appears to be the most logical and effective way to fundraise. But what about other methods?

We see big businesses, corporations and Angel investors donate substantial sums to charities, funds and projects. The question is, is there something we don’t know about why they do it? Are there hidden indirect benefits that small business owners must know about?

To shed some light on the matter, I interviewed Dr Amiran Azaladze – a Georgian-born businessman, financier, politician and professor. His company, Saqs Investment, is a successful enterprise with branches in multiple countries, including the UK and Hong Kong. Dr Azaladze shared his insights into the ways of raising funds for a startup, as well as the perks and risks of donation-based crowdfunding.

An interview with Dr Amiran Azaladze

Jane: As a CEO, you must have had a fair share of experience dealing with fundraising for projects. What would you say is the best way to raise money for a startup?

Amiran: Before you come to the decision to start crowdfunding, you need to think about the ways of fundraising.

When you have an idea, some experience and a small business – you are successful, and you think “Okay, I need more, I can do more, I can extend my business to other countries or states”.

So you need more money to operate and grow.

Then you have two options: the first (and easiest) way is a bank loan, and that’s the worst decision you could make in your life. This will inevitably put your business under pressure.

You need an equity to give as a guarantee to the bank in order to receive the loan. That is the worst way to gain funds for your business because everything depends on your success, and in business it can come in 3, 4, 10 years… Sometimes it comes instantly, but you can’t bet on it.

If you’ve had your business for 4-5 years and reached a certain level of financial success, the second (and best) way to fundraise for an idea is IPO – Initial Public Offering.

This, I think, is the best way because it gives you a huge number of opportunities to make money – not only by selling your stocks in the beginning, but also through the benefits that you receive as a result of the sale. Your responsibility is much more flexible as opposed to a bank loan because you only pay interest rates from your income. In contrast, a bank doesn’t care – whether you make money or not, you need to pay an interest rate on a yearly or monthly basis. But when you have investors from your IPO, you do not have any fixed fees because the investors are shareholders. It gives you freedom – if you don’t make money, you don’t pay anything. If you make money, you share profits. This, I think, is the best way of fundraising.

However, there are special requirements to get an IPO. New York stock exchange, London stock exchange, Amsterdam stock exchange – all of these have their own requirements. For example, average turnover – your corporation must have billions of dollars in turnover to get into New York stock exchange, while the requirements for London stock exchange are lower, and etc.

If we go to Asia, it’s very easy to publish your IPO. For example, the New Zealand stock exchange has very low requirements. But the higher requirement a stock exchange has, the more likely you are to be successful – there are more investors, more publicity…

If you do an IPO in the New York stock exchange, you will become famous all over the world, Bloomberg will publish about you. This is the best way, but the demands are high – you need to sell your success story.

If you do not want to go to the bank but your turnover isn’t high enough to get an IPO, you turn to crowdfunding.

Jane: When you can’t do an IPO, would you say that you should resort to investment or donation-based crowdfunding?

Amiran: People always get confused with terms such as investment-based crowdfunding, Angel investors, donation-based crowdfunding, etc. All of these are very different. If we are talking about donation-based crowdfunding, it can be done if your project is non-profit. In this case your organisation cannot be LLC or any other type of commercial business. In any other situation you can get donations.

In most countries a donation is not considered income and neither the payee nor the donor are taxed. However, if you are a for-profit business, investment crowdfunding is definitely best.

Jane: So tell me, why would a business want to donate money to a charity? Is there any way a company could potentially benefit from it?

Amiran: That’s a very good question. I think that over the past decade the social business has become very popular and a lot of entrepreneurs go for it.

We have a variety of industries, from plastic recycling to social care. We also have corporations and investment foundations with a high level of social responsibility, and they will want to donate to those social businesses. Huge funds such as USAID have policies for upcoming years – say, in 2025 we will donate to projects in agriculture. This is where donation-based crowdfunding comes in. And there aren’t any requirements such as those you have for an IPO!

Jane: So would you say that businesses donate money to these projects just to improve their reputation and to make themselves feel good, or is there any other kind of benefit that we don’t know about?

Amiran: There are two types of organisations – the first is non-governmental foundations, such as USAID, that finance business projects. The second type is big corporations that do this because of their social responsibility policies. There is no other purpose for making donations, especially not income – these guys know how to make money and they have other projects for that. But social responsibility is a very important part of corporate culture.

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Editor’s note

Crowdfunding is the preferred choice for startups and small businesses to fundraise. It doesn’t require anything from your company, neither does it burden you financially. If your idea has enough potential, it will provide the necessary exposure and attract publicity.

Donation-based crowdfunding offers multiple benefits to the donating companies: 

  • Financial. There can be some tax relief opportunities in the USA and the UK for companies and individuals that donate in eligible organizations. 
  • Marketing. By donating to charity, you create opportunities for both external and internal promotion of your business.
  • Corporate culture. Charitable donations are a great tool for boosting your employees’ morale and improving the company’s image.
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