Many Hands Make Light Work – Thanks to Crowdfunding

Last week I looked at the growth in social lending, particularly through sites such as Zopa and Funding Circle.

This week, another possible way of funding your business: another idea whose time has come and which will play an increasingly important part in business – especially for start-ups – in the coming years. Welcome to crowdfunding.

The idea behind crowdfunding is simple – lots of people come together to fund a project, which might be a book, a film, travel… Or a business.

However, there’s one crucial difference between social lending and crowdfunding: with social lending, you’re borrowing money and you’re going to have to pay it back. With crowdfunding the money isn’t quite a gift, but you’re definitely not going to be asked to pay it back.

The best way to explain the concept of crowdfunding is with a real life example. So let me ask you a simple question: Would you Marry a Farmer?

Lorna Sixsmith is a wife, mum, ex-teacher and social media consultant. Crucially, she’s married to an Irish farmer – and she wanted to write a book about it. As you’ll see from her site, she estimated that the total cost of the book would be in the region of €9-12,000. She wanted to raise around half of this money through crowdfunding, and used an Irish funding site – www.fundit.ie

Well, congratulations to Lorna, because she’s raised the €6,000 she wanted, from a total of 191 people. (I’ll save you the trouble – it’s an average of €31 each – around £26 at the current exchange rate.)

But as you’ll see from her site, these people haven’t just given Lorna the money – they’ll be getting something back in return, ranging from an e-book (for €8) right up to €1,000 which allows the donor to name a calf on Lorna’s farm, have a blog about the calf and, as you’d expect, receive plenty of books. €1,000 might sound a lot of money to fund someone else’s project, but used properly – especially by a company that supplied farmers, for example – I could see it as a quirky and very effective piece of advertising.

So far so good – and haven’t we all got a project at the back of our mind that would cost around five grand and we’d love to do. Especially if someone else will pay for it…

But it’s not that easy. As Lorna says in an excellent article on what she’s learned about crowdfunding, it’s like a full time job. You’ve got to promote yourself, and you have to be prepared for rejection.

But with the banks continuing to be cautious in lending to small businesses – especially start-ups – I can see crowdfunding as a viable way for embryonic SMEs to generate capital. But your project needs to be worthwhile in the eyes of other people – and like Lorna, you need to give something back to your funders.

So what can you give back – especially if you don’t have a book or a massively photogenic pedigree calf? There are three things which spring immediately to mind: your expertise; the experience of crowdfunding and one very simple commodity – your time. I was really impressed reading through the range of offers Lorna made – which you couldn’t get anywhere else. That’s the key question to answer: what can my business give someone that they can’t get from anyone else?

So that’s social lending and crowdfunding: two sources of business finance whose time appears to have come and that you need to be aware of. I’m not suggesting you immediately abandon all forms of conventional funding – but I am saying that the next few years are going to see different and imaginative ways of funding your business. And that when the bank manager says, “I’m very sorry, the risk assessment unit have had a look…” it may be the beginning, rather than the end.