The Crowdfunding Phenomenon
Most businesses need some starting capital to get off the ground. Unfortunately when the economy goes downhill, most investors and lenders become very cautious. Getting that early cash injection can be a tough sell for even the most persuasive entrepreneurs.
In recent years a new form of business funding has gained great traction. Crowdfunding (sometimes called crowd-sourcing) takes full advantage of the generosity of the social internet, networks of colleagues, friends and communities to start new projects.
For most ventures this has the effect of cutting out publishers, shareholders or investors and putting the creative control of a project fully in the hands of the entrepreneur. It sounds like a perfect system to many business start-ups. Is crowdfunding really that good, or are there potential disadvantages?
The Current Landscape
According to research from Gartner, crowdfunding platforms raised an estimated $1.6 billion in 2009. The amount of money generated by crowdfunding platforms is forecasted to increase to $6.2 billion in 2013.
Crowdfunding can be conducted directly on a businesses website. But many choose to use established crowdfunding sites to raise the profile of their new venture and funding campaign.
Kickstarter was established in 2009 and is the most popular and well known crowdfunding site. It is ideally suited for creative projects from music, art, films, games and many more types. As of April 2013, Kickstarter has successfully raised more than $460 million in over 38,750 projects.
The great thing about Kickstarter is that they claim no ownership over any part of the project. However, they have adopted the “all-or-nothing” funding model. You must reach the funding goal set at the beginning, else you won’t receive anything.
Founded in 2008, Indiegogo is open to everyone and allows any type of project. Any donations sent to a project are kept, even if the full funding goal isn’t reached. Millions of dollars have been raised through Indiegogo, for creative projects, entrepreneurial ventures and cause-related ideas.
Profounder was started in 2009 and has focused on more traditional entrepreneurs. They provide the platform and tools for growing a business by utilizing social networks. While not as high profile as the previously mentioned platforms, it is perfect for entrepreneurial projects.
This is the crowdfunding platform of choice for non-profit organisations and individual fundraisers. FirstGiving was started in 2003 and has raised over $1 billion dollars since its inception.
Pros & Cons of Crowdfunding
- It is an inexpensive method of raising funds.
- It presents a low risk for investors.
- Encourages crowd feedback and audience engagement.
- Investors have no protection from frauds, scams or other problems.
- Difficult to raise the necessary funds without an existing customer base.
- The business plan becomes open and ideas can potentially be stolen.
The usage of crowdfunding is set to skyrocket, and it is a funding model that all new ventures should at least consider.