In crowdfunding, customers or investors provide direct financing for a product or service. Crowdfunding uses the web to collaboratively fund projects, company growth, or expansion. Kickstarter and Indiegogo are two of the best known project-funding platforms in North America.
Crowdfunding is an off-shoot of crowdsourcing where many people collaborate (by contributing ideas, labor, testing) to help make or improve a product.
Crowdfunding, which is divided into two models, is used for a variety of purposes:
Donation-based crowdfunding does more than enable project financing, it also supports companies dedicated to solving bigger problems.
For example,
To raise funds for non-profits seeking support for a cause. Kiva.org is one such crowdfunding site dedicated to funding microloans for developing countries. In this structure, the business owner pays back the principal and interest.
To garner interest in a product or idea by rewarding contributors or investors. Each funding level returns a different reward in the form of product or sponsorship promotion. Ouya, for example, is an open source gaming console that raised $8.5 million in 29 days. Ten months later its backers received their game consoles.
Investment-based crowdfunding is used by companies seeking equity funds and to gain access to investors and is facilitated by sites like SeedUps in Canada or Bondora by isePankur in Europe.
For example,
To find investors to grow a company or increase production. Start-up Soccket is the brainchild of CEO and founder Jessica Matthews. It's a soccer ball that gathers and stores kinetic energy as players kick the ball around, then you can plug in its small light and the stored energy powers an emergency lamp. Soccket raised $475,000 in a recent funding campaign.
To raise equity in return for shares in the company. CrowdCube is one example of an equity site that small businesses can use to issue shares to authorized investors who want to make small investments.
If your company needs a financial shot in the arm to facilitate growth and conventional forms of financing don't meet your needs, crowdfunding may be the answer. How do you decide whether crowd-funding is right for you? To find out,
download this interactive spreadsheet developed by Lyn Blanchard at Creekstone Consulting Inc.
How did all of this web-based financing evolve? Due to the banking fraud of 2008 that led financial institutions to retreat into risk-averse decision-making, small and medium-sized companies had real difficulty securing funding. Companies in different stages of growth, from start-ups to those expanding their businesses, scrambled to find working capital or project-related financing. Enter crowdfunding, which can be a boon to cash-strapped entrepreneurs.
