Crowdfunding: An exciting new source of investment

Crowdfunding: An exciting new source of investment

What is it?

Crowdfunding is a relatively recent concept used to raise funds for a business or project. The process has developed as an alternative to more traditional methods such as bank loans or angel investment where a sole person would fund an idea.  With Crowdfunding a ‘crowd’ of people contribute towards a business’s target fund. This means that each person in the fund contributes a small amount of capital towards the business, sometimes this can be in return for a share of the business, but usually it is in return for first access to the product or other special offers.

As a means of financing, it tends to be more casual than its alternatives; many websites have been set up (such as crowdfunder.co.uk and kickstarter.com) where entrepreneurs can advertise their businesses and ideas in order to gain funding. Anybody can browse these websites and contribute towards a business’s fund.

It is also perceived as a potentially easier way to raise capital, with bank lending currently at a 6 year low. You can also benefit from the experience and knowledge of a number of backers rather than just the one also if you have a large number of investors in your product/business it gives a clear indication that there is a customer base for your idea!

 

People often advertise their projects on twitter in order to attract more funding.

 What is the typical amount?

Websites will receive commission from the total fund raised so this needs to be factored in when calculating the required capital; most websites have a policy that if the target capital is not reached there are no fees.

The average amount raised for the industry is between $2000 to $10000. The amount of capital asked for depends on the type of business and can vary from website to website, for example kickstarter.com features many different types of businesses and projects from video games to budget films which require varying sums of money. In comparison the website Crowdcube.com is more business orientated and the average amount raised per project was closer to £150K.

There are many websites online which all offer a very similar service, however kickstarter.com is the most popular. The most recent figures published by Kickstarter show there has been a total of $381 million dollars pledged on projects published on the website and 73,621 launched projects. The project which has raised the most funds on Kickstarter for example is the Pebble wrist watch which raised $10,266,845. The amount of projects financed and the amount of money raised clearly shows that Crowdfunding is a successful alternative source of finance.

Disadvantages

There are a few disadvantages of using Crowdfunding websites, namely if you just fall short of your specific target amount, your funds will not be released.

There is also the problem of listing your idea publicly if you are afraid that other people will copy your idea and reproduce it. Though the probability of someone copying your idea is similar to that of launching your business and someone replicating your idea before yours is more renowned.

Due to the nature of Crowdfunding the very fact that your idea is so out in the open may mean that it discourages reproduction of your idea if your business makes a name for itself as the first of its kind. Patents can also be used to limit others replicating your product.

Already a successful method of financing for thousands of businesses, if you are having problems finding investment to launch your business or simply wish to gauge whether or not there is a market for your idea Crowdfunding could be the way forward for you.

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