Croudfunding – the
financing method that involves funding a new business or a project with
relatively modest donations from friends, families and strangers – is becoming
popular. It is clear beyond any shadow of doubt that, given the current
economic downturn which caused banks to tighten their purse strings, one way
you can get your business off the ground is to find alternative
sources of funding McCoy(2013). Popularized by Kickstarter.com in the United
States, crowdfunding can be that alternative method of raising finance for your
business, project or idea.
Effective Beyond Belief!
Independent studies
suggests that, since some investors may be leery about investing in an unproven
idea or business, crowdfunding provides an alternative way to source
seed capital from friends, families and strangers. What is more surprising is
that most of the crowdfunding platforms(another name for a crowdfunding site) won’t
charge you for publishing a pitch or a business idea. But they are entitled to
some commission(in most cases, around 5% commission) when you reach your
funding target. In view of this you will need to factor this commission into
your investment total. More important, though is that you won’t pay
them a cent if you don’t meet your target.
It is the absolute
interest of any businessman or businesswoman to promote their business.
In that regard crowdfunding can provide a powerful platform to raise awareness
of your proposed business or start-up provided that you are serious about
promoting your investment bid successfully. This view is simply a reflection of
the fact that crowdfunding can give you a newsworthy story to pitch not only to
your local press but also to your national press with the result that you may
end up attracting more new business. It is worth noting here that when you
reach your target, crowdfunding can equally be the avenue for passing a clear
message that you have the public behind you across to potential clients, future
investors and suppliers. In the bigger picture, crowdfunding is a time-tested,
fast and efficient fundraising tactic: Several start-ups or new businesses have
reached their targets in a matter of few days by using this approach(Adams,
n.d.)
The Dawning of A New Era
Worldwide, new
technology is unleashing a storm of practical and efficient
innovations that makes fundraising quicker and easier. It is thus not
surprising that peer-based lending sites such as SoMoLend.com, investor-based
sites such as CircleUp.com and reward-based sites such as Kickstarter.com are proliferating.
However, from a historical standpoint, raising money from collective groups of
people is not a new concept. During the late 19th and the first
half of 20th centuries, former slaves pooled money to
fund businesses and other educational organizations. In fact, all
over the world, a type of micro-lending has been practiced for centuries: As
seen with “sou sous” in Ghana, “chit funds” in India, “tandas” in Mexico,
“pansanaku” in Bolivia”(McCoy, 2013) and “isusu” in Nigeria. So what is
different is not the practice, but the method: the use of
information technology.
Reward-Based
Crowdfunding
Popular reward-based
crowdfunding sites which tend to attract artists, entertainers, designers
and other providers of goods and services include Indiegogo.com, RocketHub.com,
and Kickstarter.com. This is how it works: First, you pitch your project and
create a monetary goal of, say, $30000. Second, you engage social networking to
drive friends, families, and even strangers online to donate money. Depending on
the amount they donated, your contributors receives, in return, a personal
thank-you or other forms of gifts. A real life example of this simple
explanation is illustrated by the
Antonique Smith’s case( known for playing Faith Evans in the film Notorious). As was reported by Frank McCoy, a business writer for the Black
Enterprise magazine, the experience of Antonique, the singer and
actress, offers us the most perfect model of reward-based crowdfunding. He describes how reward-based crowdfunding helped
her to raise fund this way: “Singer and actress Antonique Smith …garnered
little more than $50,000 via her Kickstarter campaign used to help her
launch her first solo album, Speechless, bypassing a record label. With only 35 days
to raise funds, Smith utilized social media and live performance to communicate
with her supporters. She had 219 donors; a few gave $7,500 or more in a single
pledge. Supporters who donated to her campaign were offered such rewards as
exclusive listens to tracks, Skype sessions, a day spent with Smith, and vocal
lessons. With more than 100,000 followers on Twitter and nearly 8000 likes on
Facebook, Smith notes she consistently communicates with her fans”(p. 40).
A natural question to
ask here is this: What made Smith’s campaign successful? Three answers stands
out. First, she delivered a good pitch in the form of engaging videos and perks like exclusive offers. Second, she
was proactive by using social media(such as Twitter and Facebook) and targeting
influencers via live performances. Third, she had an audience that cares, which
included an inner circle of fans, family and friends(McCoy, 2013).
Equity-Based
Croudfunding
The passage of the JOBS
Act made it possible for companies to sell stocks directly to the public as
well as solicit money via social networks and other online avenues. Hence,
depending on their comfort level with selling some control of the business,
entrepreneurs can raise up to $1 million
online every year from people of all income ranges.
In a broader sense,
given that venture capital firms finances only more established, early stage
entities and that small business lending from banks is harder to come by these
days, the notion of crowdfunding by selling equity shares is a great strategy
for start-ups or new businesses. However, because the Securities and Exchange
Commission(SEC) has not completed
writing the rules governing such platforms, equity-based crowdfunding technique
is currently in limbo(McCoy, 2013).
It is a general rule
that entrepreneurs must provide information to investors and the SEC in order to sell equity using crowdfunding; and the amount of information required in this regard usually grows more extensive according to the
size of the entrepreneur’s offering. In addition,
to sell equity via
crowdfunding, the entrepreneur can only use the services of a qualified
intermediary like a broker-dealer, a crowdfunding site or a related web portal
who are authorized to sell shares.
As a practical matter,
it is the “crowd” who will decide if your new company or start-up is worth investing
in. What is clear is that to succeed you must have a compelling business,
product, or an idea, a strong following, as well as a passionate vision for
what your business or idea can become. My contention here is that you should be
able to make the crowd feel inspired to invest in your project. The bottom
line: You should create a charismatic pitch or display evidence of outstanding
innovation in addition to proving the crowd with financials and other
information.
Investment-Based
Crowdfunding
This form of
crowndfunding offers a custom investment structure whereby the donors or
funders do not receive an equity stake that would tie up their money
indefinitely. Instead, by using this approach, your donors or funders(which may be anyone –
accredited or nonaccredited) sign an agreement with you to receive regular payouts for a set period of time(which can be
anywhere from one to 6 years) based upon
a small percentage of your business’ revenues.
The experience of McKenzie
Slaughter, the CEO of Beyond Capital
Markets(a New York based alternative investment and research company)
illustrates what may be called the standard strategy to investment-based
crowdfunding. Here is an excerpt from the Black Enterprise magazine which
explained her stragegy in simple terms(McCoy, 2013): “Last July, she
launched Beauty & Bull magazine, an interactive digital magazine created
by women financial specialists
for women investors. To fund the
venture, slaughter used SoMoLend.com, a localized matchmaker and peer-to-peer lending
platforms for companies seeking $1 million or less. Instead of equity, the
funds are structured as debts. Prospective borrowers fill out a loan
application, create a SoMoLend profile, and lenders, who may be friends, family or accredited investors, connect to due diligence. When satisfied, the
lenders make loan offers. If accepted by the entrepreneur, the lenders are
repaired with interest, anywhere from 3% to 22%. SoMoLend also charges
businesses a 4% loan origination fee”(p. 42).
The
Caveats!
It should be noted here
that there are some caveats to
crowdfunding. First, even though your donors can give your start-up or new
business massive support(called the seed money), they can also tear down your
business if you fail to deliver regular updates on your product or service. In
some cases, your donors may even ask for their money back. Second, crowdfunding
has its critics who believe investors and donors could become victims of fraud
even though the practice has received support from lawmakers and business
advocates.
So using this approach successfully
means following three simple rules: (1 ) Have a solid plan for how much money
you need, how you intend to spend it, and how meeting your goals will impact
revenues; (2) When you raise the money, use it effectively; (3) Be sure to make
good on any perks you promised your donors of funders.
References
Adams G.(n.d.): What is Crowdfunding? Retrieved June 28,
2013 from http://www.startups.co.uk/what-is-crowdfunding.html
