How to use crowd funding to finance your business?
1st Nov 2012 | 15:00
If the banks say no, the crowd might say yes
Businesses are still having problems obtaining the financial support they need from traditional sources such as banks and family and friends, could the rise of crowd funding offer a new way to gain the funding your business needs?
Pebble SmartWatch raises $10 million
Crowd funding has become a phenomenon over the past year. In April all records were broken when the developers of the Pebble SmartWatch raised over $10 million (£6.47 million) from 69,000 backers, after only asking for funding of $100,000 (£64,700) to develop their product. And in May little-known indie recording star Amanda Palmer shattered KickStarter funding records by raising the $100,000 (£64,700) she requested to record a new album, book and tour in just one day, and then went on to raise nearly $1.2 million (£776,000).
This kind of success isn't common, but shows that with the right product, crowd funding can be a viable alternative to venture capital, angel investors, or traditional financing from the banks. The key to attracting the level of investment your business needs is to clearly understand the investors your business is likely to attract.
At the moment, most crowd funding takes place in the US. The recent JOBS Act that has become law allows anyone to offer investment into any business. In the UK crowd funding exists, but the current regulations that affect this kind of investment remain a barrier to crowd funding becoming more commonplace. The Government's Business Funding Taskforce is looking at all areas of small business funding with crowd funding one of the potential initiatives it is looking closely at.
Crowd funding business
An example of how small business can potentially use crowd funding for their projects is UK and Irish business Caped Koala, the company behind PoraOra a virtual 3D online universe that is transforming the way that 5-12 year old children learn, is using Kickstarter to fund its development.
With the money raised through Kickstarter, Caped Koala will develop new worlds, Pora Pals, gaming features and apps. Their additional goals include creating a coding game and developing the tools to enable children to create their own world. Caped Koala wants to give all children the opportunity to access this valuable and effective game based learning resource.
Getting your business pitch perfect
No one is claiming that crowd funding is an easy way to cheap investment opportunities, but these new platforms could offer your business a source of financing that is a good fit with the product or service your enterprise is developing. Use this checklist to ensure your crowd funding pitch reaches its investment goals:
- Perfect presentations - How your business presents the goods or services you want to develop is vital to get right. Your business must produce a compelling presentation to convince investors of your business' value to them.
- Ask for the right amount - It's important to do your homework when developing a crowd funding pitch. One of the fundamental mistakes often made is not asking for enough money to get your project off the ground.
- Promotion is vital - Your business can't just rely on it's the pitch that is on whichever crowd funding site your company is using. Your business still needs to have a complete and comprehensive promotional campaign to generate interest in your crowd funding pitch.
- Multiple investments - Crowd funding is just one way to potentially finance your business' project. Often, a number of investment systems will need to be used to gain the level of investment your business needs. Don't rely soley on crowd sourcing to fund your project.
Ultimately, crowd funding should be approached with all the due care and attention your business would use when looking for an investment from traditional sources.
Where to go next for crowd funding
KickStarter is to launch in the UK but there are other home grown sites that can help fund a business.
- Funding Circle – UK online marketplace for funding that works along the lines of Zopa
- Crowdcube - Crowdcube matches ideas with large and small investors
- Enterprise Den – Matches businesses with angel investors
- Wefund - Crowdfunding for creative industries and for creative ideas
- PeopleFund - From the makers of River Cottage, Hugh's Fish Fight and Chicken Out which brings together individuals with fresh business ideas.
- CrowdFunder - Crowdfunding for creative and inspirational ideas
- Sponsume - Small stakes in big ideas for creative industries and entrepreneurs
- Please Fund Us - Crowd funding for creative projects in music and fashion
- We Did This – Arts funding now part of Peoplefund.it