Crowdfunding for Startups
Crowd funding (sometimes called crowd financing, crowd sourced capital, or street performer protocol) describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations. Crowd funding occurs for any variety of purposes, from disaster relief to citizen journalism to artists seeking support from fans, to political campaigns, to funding a startup company or small business or creating free software.
Crowd funding is being experimented with as a funding mechanism for creative work such as blogging and journalism, music, and independent film, and also for funding a startup company. Community music labels are usually for-profit organizations where “fans assume the traditional financier role of a record label for artists they believe in by funding the recording process”.
Since pioneering crowd funding in the film industry Spanner films have published a useful ‘how-to’ guide.
Innovative new platforms, such as RocketHub, have emerged that combine traditional funding for creative work with branded crowdsourcing – helping artists and entrepreneurs unite with brands “without the need for a middle man.
Types of Crowfunding
An entrepreneur seeking to use crowd funding (example for seed money) typically makes use of online communities to solicit pledges of small amounts of money from individuals who are typically not professional financiers. A range of variations are possible, for example:
The solicitation could be to back an idea with no direct material return offered to those making a pledge. This type of crowd financing has long precedents including artistic patronage and the normal activities of charity fundraising. Sometimes a threshold pledge approach is used, in which all pledges are voided unless the threshold amount is reached before the deadline.
Another approach invites a display of sponsorship in return for the cash pledged. A widely documented internet-based example is The Million Dollar Homepage.
The solicitation could be to offer a loan (microfinance) e.g., Kiva, Zidisha, etc.
Some kind of quasi-equity investment could be offered, though any such scheme would need to avoid falling under any applicable financial regulations regarding making an initial public offering. One such scheme was introduced in February 2010.
Straightforward equity investment. When multiple parties are involved, this can involve a lot of work. There are platforms to make this easier.
A threshold pledge system as above, but rewards are offered in return for gifts or donations.
Pros and Cons
Proponents of the crowd funding approach argue that it allows good ideas which do not fit the pattern required by conventional financiers to break through and attract cash through the wisdom of the crowd. If it does achieve “traction” in this way, not only can the enterprise secure seed funding to begin its project, but it may also secure evidence of backing from potential customers and benefit from word of mouth promotion.
Against these advantages is the requirement to disclose the idea for which funding is sought in public when it is at a very early stage. This exposes the promoter of the idea to the risk of the idea being copied and developed ahead of them by better-financed competitors.