The term “Venture Capital” is a misnomer. The reality of it is that the providers of such capital rarely “venture” but prefer the prospective investment to have momentum and a track record. Perhaps it should be renamed “Development Capital”. Similarly, banks and services like trade finance and factoring all require high hurdles to be jumped before funding can be facilitated. If you have big resources and big successes under your belt, you can raise big dollars, but what for start-ups? Crowd funding is continuing to prove itself the funding option of choice for the start-up community.
Atop the funding ladder is the Stock exchange where IPOs can provide large sums of funding for rapidly expanding ventures. But with considerable cost and high levels of probity, listing on the stock exchange is a world away for many early stage start-ups. As you move down the funding ladder, you find at the lower tiers such options as Angel investments which are relatively guarded when it comes to risk, and who will take a sizeable slice of equity in recognition of their speculative support. Governments have been subject to tighter purse strings so grant programs are becoming less available, and requiring a greater number of conditions to be met.
So there has been an increasing gap at the bottom of the funding ladder. There needs to be a mechanism for those who require small amounts of money, up to (say) $30,000 for very early stage seed capital, especially in the early days when a business is high risk and very speculative, and does not require the entrepreneur risk their own collateral, or need them to jump through high hoops. It is Crowd Funding that is proving to be the perfect solution to this gap at the bottom of the funding ladder.
For those who have no cash to put towards raising more capital, crowd funding is the perfect option. In most cases, posting a campaign on a crowd funding site like iPledg will cost you nothing. Furthermore, not only does it cost you nothing to start a funding campaign, if you don’t meet your funding target, it has cost you nothing to at least give it your best shot (which still gives you experience, exposure and feedback). And even if you do meet or exceed your funding target, the funding costs of a successful campaign can be covered by your funding target, meaning that capital raising through crowd funding will not cause you to ever reach into your own pocket.
Given there are no prospectuses to prepare, no lengthy forms to fill in, and no protracted application process to complete, crowd funding represents a quick format of capital raising to get underway. Once the campaign description is written, a short video is made, the gallery of pictures is uploaded and a funding target and timeframe established, most campaigns can be underway in a matter of minutes – far quicker that any traditional form of capital raising.
Apart from simply providing you with the money that you need to get your venture underway, crowd funding can also provide benefits that traditional capital raising could never offer. Many project creators recognise that a crowd funding campaign is an excellent way of making presales, offering the very product that is being funded as the rewards to those who pledge their support. In effect, the initial production being funded can be sold to fund the start-up. Successful campaigns also act as a form of market validation.
But even more importantly, the social proof offered by successful campaigns can often be more valuable to the project creator than the funds being raised. By the mere fact of a large number of project supporters pledging their support to the campaign, a strong message is sent to potential financiers, suppliers, distributors, partners, etc that this is a sought after product or service. Strong social proof will attract interest from a number of parties that may help commercialise and monetise the product on a more broad scale.
And when you take the whole concept of crowd funding to its full extent, it is all about engaging with the crowd, building your tribe, your community and followers who will not only become customers but advocates for you and your project. No other form of funding provides a capital raising facility at the grass roots of business, as well as a form of engagement that links start-ups closer to their potential markets.