Crowdfunding for business

Crowdfunding for business

Crowdfunding has dominated the fundraising landscape recently. It is predominantly used for raising capital for the likes of the arts and not-for-profit sectors.

Crowdfunding is about persuading individuals to each give you a small donation – $10, $50, $100, maybe more.

This has become possible in recent years thanks to a proliferation of websites that allow nonprofits, artists, musicians  – and yes, businesses – to raise money. This is the social media version of fundraising.

There are more than 600 crowdfunding platforms around the world, with fundraising reaching billions of dollars annually, according to the research firm Massolution.

More than 600 crowdfunding platforms around the world raise funds reaching billions of dollars annually.

It is also possible to use crowdfunding to assemble loans and royalty financing. The Lending Club site, for example, allows members to directly invest in and borrow from each other, with the claim that eliminating the banking middleman means ‘both sides can win’ in the transactions. Royalty financing sites appear to be more rare, but the idea is to link business owners with investors who lend money for a guaranteed percentage of revenues for whatever the business is selling.

The holy grail is to sell company shares or ownership stakes in the company on crowdfunding sites.

Rules for successful fundraising

Upside  Crowdfunding provides another strategy for business start-ups or early-stage companies ready to take it to the next level – such as rolling out a product or service. Before, a business owner was subject to the caprices of individual angel investors or bank loan officers. Now it is possible to pitch a business plan to the masses.

A successful crowdfunding round not only provides your business with needed cash, but creates a base of customers who feel as though they have a stake in the business’s success.

Downside  If you don’t have an engaging story to tell, then your crowdfunding bid could be a flop. Sites such as Kickstarter don’t collect money until a fundraising goal is reached, so that’s still a lot of wasted time that could have been spent doing other things to grow the business.

It could be even worse if you meet your goal but then realise you underestimated how much money you needed. A business risks getting sued if it promises customers products or perks in return for donations, and then fails to deliver.

There is also an argument to be made that angel investors and even banks provide more than just money. They provide entrepreneurs with needed advice. Business owners miss out on such mentorship when they ignore traditional investors and turn to the crowd.

Government jumps on

The viability of this for service receives government backing in America, where the Alabama Senate is trying to give people a new way to raise money to start small businesses.

The legislation is backed by the Alabama Securities Commission. It allows someone trying to start a small business in Alabama to use social media and advertising to find small investors who live in the state. It is limited to raising $1 million, and it is restricted to Alabama businesses and investors because of federal regulations. The proposed legislation is an option for people trying to start small businesses in a tough credit market.

Will we see the likes of such being implemented by government in Australia?

Keith Whelan, The Grants Guy