Crowd Funding is booming and enables just about anyone with a great idea to ask the “crowd” for small sums of money. If enough of the “crowd” support the idea these small sums can add up to a significant investment, funding the idea to fruition.
Here’s how it works
The person seeking backing promotes their idea on a crowd funding website. Typically they create a video pitch of their idea (campaigns with videos raise over twice as much than those without). Momentum is important. Quickly creating a buzz and social proof for a project attracts more investors. Projects either make their goal or find little support. There’s little in-between.
Each project sets a funding goal, a deadline and the rewards to tempt investors.
On some crowd funding platforms this can be as simple as a thank you card or public recognition of support like a mention in the credits of a film. Where the goal of crowd funding is to fund the development of a product then versions of the product can be the investors reward.
Kickstarter lets fundraisers offer different rewards depending on the amount pledged (see the examples below). They report that 44% of projects on their site reach their funding goals.
In 2012 more than 2.2 million people backed a Kickstarter project. Together they pledged a total of $319 million and successfully funded 18,109 projects, including a best-selling novel, an Oscar-nominated movie, and a bus stop based on the hit song “Love Shack” by the B-52s.
Other crowd funders match more sophisticated investors with small businesses rewarding them with equity in the business.
Some crowd funders insist on an all or nothing funding goal. If the goal is reached every investor is billed and if not their investment is returned. Others allow the investment to proceed even if the goal isn’t achieved.
In addition to raising funds crowd funding can be a brilliant way to quickly and cheaply test demand for a service or product. It engages motivated investors who are often willing to share their expertise and spread the word about the opportunity. Many projects generate considerable PR.
Here are a few examples to get you thinking. Think about the stories these guys are telling. Do you engage people as effectively as they do?
Tyler Deeb raised $146,596 with Kickstarter from 4,022 backers pledging between $7 and $600.
Jack Sutter persuaded 7,521 people to pledge between $ and $1,000 funding $317,424 for tightstore.com
LIFX: The Lightbulb Reinvented
Money poured in for Phil Bosua – $1,314,542 from 7,521 pledges from $69 to $490
Duncan Glendinning of The Thoughtful Bread Company raised £55,000 with Crowdcube to expand their business in Bath. In July they’ll get another enthusiastic customer – we’re moving to Bath.
More crowd funders
The Economist: Raising Capital Online: The New Thundering Herd
FSA gives green light to ‘crowdfunding’
Investors using Crowdcube, an online “crowdfunding” platform, will now be able to claim compensation from the Financial Services Compensation Scheme and access the Financial Ombudsman Service if they have a complaint.
Luke Lang, co founder of Exeter-based Crowdcube, said FSA approval was “crucial” for inspiring confidence among investors and small companies using the service.
“When we talk about taking crowdfunding mainstream, it is crucial that people have that confidence of the additional protection they’ll get as a result.”
Crowdcube has helped 36 small businesses raise a combined £5m since it was founded two years ago.
Consumers can back small businesses by buying stakes with as little as £10.
For small businesses, selling shares through crowdfunding remains a very niche activity, but it is an option that is growing in popularity.
Lord Young, the Government’s enterprise adviser, said: “I am delighted to see that the UK financial services industry and its regulators are reacting dynamically to new models of business finance, such as equity crowdfunding, so that the UK can maintain its position as world leaders in this space.”