What is crowdfunding, and is it a sensible option for obtaining finance for your business?
Crowdfunding is an internet phenomenon. There have been some famous examples of successful products that have been launched via crowdfunding, including the Kickstarter campaign for the CoolestCooler Coolbox, where the creator of a cutting edge coolbox, with features including a blender and a phone charging socket, asked for $50,000 for tooling, production and marketing, and got $13,000,000.
So how does crowdfunding work?
Essentially crowdfunding is where a large number of individuals each provide you with a small amount of money for your business, rather than you asking a single entity such as a bank to lend you the money.
The money can be provided in the form of a loan, or can be in exchange for delivering your product or other “rewards”. The entire process happens online.
Sources of funding have traditionally come from friends and family members, banks, equity partners, business angels, or venture capitalists. Crowdfunding is different.
It is often used where there is a single idea that needs to be developed and produced, as in the Coolest Coolbox example.
The money can come from anyone – essentially your peers are lending you the money so it’s known as “peer to peer lending”.
The first people thought to have used crowdfunding were a UK Rock Band called Marillion, who wanted to finance their reunion tour of the USA in 1997. In return for a contribution to their tour fund, fans were guaranteed a ticket – probably for the best seats in the house – to see their heroes. The band then had the reassurance that they could afford to tour the USA, with all of the costs involved, before even setting off on tour.
Crowdfunding began in the music world and quickly spread into other areas of the arts including theatre, dance, fashion, video and film. It expanded into social causes, animals, health and charity sectors before being used for small business campaigns in around 2012.
Key players in the crowdfunding marketplace are:
- Artistshare (started in 2003)
- Indiegogo (started in 2008)
- Kickstarter (started in 2009)
Is crowdfunding right for your business?
Depending on what you want the finance for, and your attitude to risk, it may be better to go down more traditional routes such as applying for a loan or working with an equity partner, business angel or venture capitalist.
But the different styles of crowdfunding are certainly being used for capital equipment or premises and for developing new products with a large upfront cost, and for starting new stand-alone businesses.
Where can I get access to crowdfunding?
If you need a loan, a peer-to-peer lender is a good option. For a more reward-based campaign, where you will deliver something to each “investor” then a Kickstarter type platform is best. If you need equity, then look at an Equity Crowdfunding platform.
Make sure the crowdfunder you use is a member of the trade body – the Peer to Peer Finance Association – and remember that fees will be charged on top of interest, so look carefully at the costs.
What are the risks of crowdfunding?
There are risks involved. Peer to peer lender, Funding Circle, is the third biggest lender to UK SMEs after RBS and Lloyds, but it made a loss last year. If it did fail, your debt could be passed onto debt collectors and it’s likely you’d need to pay it back in full. If this element of risk is off-putting to you, then you may prefer to look at a traditional lender.
BizSmart aims to help SME and micro-business owners scale their businesses and create value through sound practical business support. We aim to give you insight and clarity and fire up your determination to succeed. You can access blogs like this and more besides through our free SmartRoom service here.