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.

Advertisements

3 comments

  1. michael shakesheff · August 23, 2013

    Ed, a friend of mine is heavily involved in crowdfunding. If anyone is interested please let me know and I will pass on his details. Mike

  2. simonjhudson · August 23, 2013

    Another key need for crowdfunding is that you have to want it for something that other people are as passionate about as you. People don’t contribute primarily to make a return on the investment (though there can be elements of that, as you note), they do it because they want to see the project come to fruition.

    The folk behind Ubuntu recently raised $6.4m through crowdfunding to develop a Linux based smart phone; not because it will be a commercial success but because those contributors are deeply (and possibly perversely) into Linux.

    Many space developments are part funded in the same way because some folk (myself included) deeply believe we should be doing it (and our politicians don’t have the vision to invest public funds).

    So a good start is to look for the geeks, not the prosaic finance folk.

    You need to pick your business idea with this in mind. It doesn’t need broad appeal, it needs deep appeal to a few; those who will get behind the idea and be excited by it. But then isn’t that true of any good business idea?

  3. Lorna · August 23, 2013

    Many thanks for the link. Yes, crowdfunding is a roller coaster with hugely exciting days and others that are deeply worrying. It’s hugely exciting and it’s a wonderful feeling to know that so many people are passionate about your plans and look forward to it coming to fruitition.
    I did make mistakes, there were things I could have done differently or better, I’m sure every crowdfunder does to some extent and it’s a steep learning curve.
    I don’t think failing to reach one’s goal is necessarily a failure either – crowdfunding is a great way to test the market. Yes, it will have taken you some time to plan and put in place but at least it’s not a huge loan from the bank that you have to pay back.
    Having a good video and rewards that catch people’s imagination and make them want them – both of these are crucial I think.
    Exciting times and it is great to see crowdfunding growing in popularity.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s