What are your options if you are involved in a start-up and you need early stage seed capital? Most would say the choices for funding are banks, grants, or perhaps even getting sympathetic friends or relatives to “kick the can”. The same applies to small business, with there being seemingly less than a handful of options for a small parcel of funds for those with little than more than a great idea and a ton of passion. That was, at least, until the advent of crowd funding.
For ever (perhaps even longer) there has been the stock exchange at the top of the funding ladder. The cost and effort to list is well out of reach of most small business and start-ups, making an IPO a non-option for smaller enterprises.
Venture capitalists say they fund start ups, but statistics show that the amount of capital offered by this source of cash has dried up by almost 90% globally over the past 10 years. That said, the reduced pool of available funding from venture capitalists is seldom granted to early stage business. Perhaps “venture capitalists” should be redefined as “development capitalists”, due to their propensity to only fund once an enterprise has a proven track record and achieved significant milestones.
Traditional sources of finance such banks, loans and debt used to be the unpalatable but necessary evil for start-ups. The GFC turned off the music when it came to dancing with the devil, as banks became more conservative in their policies around lending. So small business that already found it tough to get finance, or had to offer up all of their assets as security, now find the well dry, and little or no joy when seeking funding from traditional financiers.
More sophisticated suppliers of capital, such as trade finance or factoring, again are more aligned with businesses with some form of existing cashflow, turnover of a certain volume, and momentum. Whilst each has their merits, they do not represent viable options to start-ups or small business.
Governments in many countries offer grant programs to support initiative and innovation. Especially in areas of community enrichment, environmental benefit, and new-to-world technologies, ruling administration on local, state and federal levels often assist by offering financial grants to assist early stage concepts to germinate and take flight. Qualification for such grants is often competitive, with applicants needing to meet or exceed the assessment criteria. Unfortunately many early stage initiatives can’t meet the requirements, especially for grants that require matched funding or a co-contribution from the grant recipient, making them another non-option. Furthermore, as other funding options dry up, there is increased competitiveness for grant funding, giving each applicant less chance to receive a grant and for the total pool to be divided amongst the increased number of recipients.
The height to which start-ups and small business are required to jump when going in search of funding is getting ever higher, to a position that is nigh on unachievable for new businesses. Until recently, there was a yawning gap at the bottom of the funding ladder, leaving the most accessible rungs of funding out of reach of small business despite their best efforts to leap and grab a hold.
However, we now have a relatively new, highly accessible, and extremely flexible form of finance known as crowd funding. This exciting and dynamic form of e-commerce fills the void at the bottom of the funding ladder, giving opportunity for great ideas and initiative to be judged by “the crowd” rather than stony faced men in grey suits with boards to please and KPIs to meet. Innovators can now articulate their projects, and engage the crowd to support the campaign based on shared passion or their desire to get their hands on the sought after inducements that may be on offer.
According to Wikipedia, “Crowd Funding describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the internet, to support efforts initiated by other people or organizations.”
In addition to raising the funds required for their venture, project creators can also gain invaluable social proof, validating that there is a market for the concept or a broader appeal for the idea. This then paves the way for more traditional sources of greater funding to now venture in and further fund the project (assuming that further capital is still required after a successful funding campaign!).
The new renaissance has begun! The birth of crowd funding has given rise to a whole new world of opportunity for creative, commercial, charitable and community projects. By simply posting a project on sites like iPledg, there now exists an avenue of finance that gives the power back to the people, and allows the crowd to determine the beginning of initiatives that will shape our world.