Crowd Funding – the NEW economy (Part 1)
29/02/2012 5 Comments
“What on earth are you talking about!” tends to be the initial repsonse when you ask someone if they have heard of Crowd Funding, but it happens to be one of the fastest growing forms of eCommerce in the World. According to Gartner the Crowd Funding industry worldwide is expected to grow from a $1.2 billion industry in 2009 to almost $7 billion in 2013, that’s big!
So what is it and how can businesses use it to raise capital?
Essentially Crowd Funding is about using the “Crowd” to raise capital for your projects. A project creator will load their project onto one of the many and growing Crowd Funding platforms, set a funding target and timeframe and then use their social networks such as Facebook and Twitter to ask their family, friends and fans to make financial contributions towards their campaign, typically in exchange for a reward.
Many are skeptical, Why would you just give money away? Well if I told you that one site in the US was successfully funding over $12 million in new projects every month would that change your mind?
Kickstarter, a US based Crowd Funding site was the front runner of modern day Crowd Funding. In the last 12 months they raised almost $100 million on over 27,000 projects without the project creators having to give away any equity in their business or having to repay any funds raised!
Admittedly they have more of a focus on creative type projects but that doesn’t mean it cannot be applied to more commercial purposes. One example was the creator of the Tik Tok watch strap.
An entrepreneur in the US wanted to make a watch strap whereby you could clip an iPod Nano into it and walk around with it on your wrist. He approached Apple and they said nobody would go for it. So he started a Crowd Funding project asking for $15,000 in 30 days to build a protoype. At the end of that month Apple were phoning him after he had raised almost $1 million from over 13,000 people. He is now selling his strap in every Apple store around the world!
So why was this project successful, well there are typically 3 reasons why someone would back a project:
- They know and like the person (family and friends);
- They have an emotional connection with the project , e.g. Save the Whales (fans); or
- They just want the rewards.
In the above case many people backed the project as in exchange for their pledge they received a cool reward, e.g. pledge $50 and you will receive one of the first protoypes with a retail value of $150, etc.
So as an entreprenuer or small business owner, Crowd Funding is certainly an option in relation to the funding of new product development for example, especially where you are able to offer creative and cool rewards in exchange for pledges.
There are very few Crowd Funding platforms in Australia at present but you should expect to see this form of funding grow as it gains traction. The one to look out for in Australia is iPledg, (that’s right, no e on the end) which is a relatively new platform but which is gathering traction quickly.
So lets conclude by looking at our checklist:
- Cost of funding – anywhere between 5% and 10% typically but many Crowd Funding sites will only charge their fees if your project is successful, i.e. if you meet your funding target.
- Ease of obtaining – Its easy to set up a project, typically the costs are negligible (anywhere between $0 and $250) but you are responsible for marketing the project to your social networks.
- Speed – You have control over how many days you want your project to run for, typically anywhere from 30 days to 120 days.
- Security – none, zilch, zippo
- Consequences – You are responsible for making sure you deliver on the rewards you have promised.
- Size of funding – the sweet spot seems to be around the $3,000 to $30,000 mark but, as you can see above, there are basically no limits to what can be achieved.
So who out there has used Crowd Funding and what was your experience? Let us know how easy or hard it was to use.
The good thing is at the moment it costs you nothing to try, i.e. if you don’t succeed the chances are no fees are payable.
The focus above has been on raising capital using Crowd Funding from a pledge perspective, next week we’ll take a look at using Crowd Funding from an investment perspective.
Contact Lattice Capital on firstname.lastname@example.org for more advice on raising capital.
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