Crowd-funding: getting your small business off the ground
What is crowd-funding?
Crowd-funding in a broad sense means that a large number of investors each contribute a small amount of capital to a start-up or projecti. This way, small contributions from many people can add up to a large amount of capital - the capital start-ups require to get their business off the ground, or to start developing their product or project.
To receive crowd-funding, entrepreneurs can introduce their business idea or project on one of many dedicated online platforms (see below). If investors - or "backers" - are interested in this project and believe in its success, they can invest money in the respective project. If the platform follows an all-or-nothing approach, the capital only becomes available to the entrepreneur if the full amount that has been defined in advance is reached through investmentsii,iii,iv. A flexible funding model on the other hand allows the entrepreneur to keep the amount that has been investedv. Often, crowd-funding platforms charge a percentage of the amount raised as a service feeiii,v,vi.
Idealistic versus equity-based crowd-funding
Currently, returns on crowd-funding investments are considered intangible. While rewards for investments may be given in the form of little gifts or acknowledgements, many backers invest because they believe in the projecti.
Crowd-sourced equity funding (CSEF) on the other hand is "an innovative type of online fundraising that allows a large number of individuals to make small financial contributions towards a company and take an equity stake in the company in return"vii .
Currently, in Australia, regulatory requirements present a barrier to the use of crowd-sourced equity fundingviii. However, the Australian Government is investigating regulatory regimes for CSEF to provide access to this type of funding for start-ups, fostering innovation and entrepreneurship in Australiavii.
Crowd-funding platforms in Australia
Even though crowd-sourced equity funding is not allowed in Australia yet, start-ups and entrepreneurs can choose from multiple local and international crowd-sourcing platforms to present their ideas and projects to convince backers.
1. Kickstarter: Since their launch in 2009, US$2 billion have been invested in 77,000 creative Kickstarter projects. Following an all-or-nothing funding scheme, this platform is open for any kind of start-up to raise funds, ranging from filmmakers and musicians to engineers and designersii. As at early February 2015, successful Australian projects include a folding electric bike (448 per cent funded) and a key organiser (2,052 per cent funded).
2. Indiegogo: As one of the largest crowd-funding platforms globally, Indiegogo gives entrepreneurs access to funds from an international community. As opposed to Kickstarter, Indiegogo offers both flexible and fixed funding options, and fees depend on if you manage to raise your target amountv. The Indiegogo Playbook gives tips and best practice examples on how to create a successful crowd-funding campaign.
3. Pozible: Another global crowd-funding platform, Pozible has raised US$25,159,494 in pledges for 7,994 projects (as at 5 February 2015). Promoting a success rate of 57 per cent and following an all-or-nothing funding model, Pozible has local offices in China, Australia, USA, & Singaporeix.
4. VentureCrowd: This Australian crowd-funding platform allows investors to exchange cash for an equity interest. A business network of partners, including angel groups, incubators, venture capital firms, digital agencies and others, pre-screen all businesses before they can list for investment. Entrepreneurs will only receive their financial backing if they hit their investment targetiv.
5. OzCrowd: At OzCrowd, people can not only crowd-fund business projects, but personal and charity-related ideas, too! So far, at least $1,250,000 has been pledged. Fees depend on if you choose a fixed or flexible funding modelvi. A recent, successfully funded project is the "Blokes in the Bush" campaign: a group of Australian photographers raised $1,000 to produce and sell a calendar that shows... blokes in the bush. Proceeds are donated to Cancer Support WA.
While crowdfunding can help you get your start-up off the ground, it's safest not to rely completely on this option to raise capital, as it's very easy for start-ups to get lost in the huge number of competing projects; especially without sufficient marketing effortsx. Instead, consider additional ways to gain funding for your start-up, such as applying for grants, finding an investor (including angel investors and venture capitalists), or seeking support from a business incubator. Most importantly, aim to keep your initial spending as low as possible.