For startups and young businesses, crowdfunding has become a positive characteristic of the social media phenomenon. It provides the potential to raise finance in a fraction of the time it would have taken only five years ago.
BETTER ACCESS TO CAPITAL
Crowdfunding gives startups better access to capital, letting you connect to more varied and larger numbers of people online, than face-to-face. It also negates the need for lengthy due diligence meetings with angel or seed capital fund investors.
The prospect of raising finance through your website, or a crowdfunding platform, is more appealing than a venture capital (VC) firm tour across many European cities. VC funding is very relationship-based. Investors rarely move outside their comfort zone and pitch success rates are less than 2%.
Crowdfunding schemes were initially reward-based; funding creative pursuits. Investors swapped their finance for a project memento, like a CD, or perks such as tickets to a crowdfunded movie premiere.
This form of crowdfunding has huge advantages for entrepreneurs, as it’s feasible to get your product or project up and running without having to relinquish any ownership or equity in your business.
Equity crowdfunding exchanges shares, or a stake in the ownership of your company, for the finance provided. Entrepreneurs benefit as this type of equity financing doesn’t incur debt and more sophisticated investors could become a good source of advice and contacts.
While equity crowdfunding is still in its infancy, it has huge potential. A 2014 survey of 87 firms conducting successful equity fund raising campaigns reported a staggering 351% quarterly revenue increase.
Larry Lang, co-founder of equity crowdfunding platform Crowdcube, thinks crowdfunding could become a “fully established model of financing,” negating the historic reliance on established financial services organizations to help companies raise capital.
Kickstarter, the largest reward-based crowdfunding site, famously hosted the funding for the Oculus Rift – a virtual reality headset – in 2012. Oculus VR surpassed its target for the Rift easily, raising $2.4 million. It was sold to Facebook this year for $2 billion. Not bad for a startup looking to raise $250K!
The massive awareness Oculus created for itself contributed much to its equity value. It’s unlikely Facebook would have agreed the $2 billion price tag, if Oculus had only developed the hardware and still had to create recognition of its product.
The crowd, literally, bought into the Oculus Rift idea from the outset. Although crowdfunding is not a panacea for all things, it works well for projects that capture consumers’ imaginations, and where they comprehend the impact of the technology.
It seems that broad awareness has triple impact, helping sales and finding equity investors, as well as increasing the price eventual buyers are prepared to pay.
Despite crowdfunding’s benefits, there are other factors entrepreneurs should consider before choosing it as a financing option. Regulation is far from established globally. Countries, like the UK, have a well-regulated environment but the US is still fine-tuning its legislation, with no timescale set for a resolution.
You should also consider platform fees for hosting your business concept. Most charge around 5% if the target is met, but there is a wide variety, ranging from 3.5% to 9% in certain circumstances.
At Falcon Social, we are acutely aware of the internet’s global capacity to connect individuals and groups of people. Our business is here because of social media and continues to grow and evolve in tandem with these phenomena.
If social media interaction can transform such a traditional field as equity financing, almost any area of enterprise could be affected – from co-creation for product development and marketing, to recruitment.
Crowdfunding has grown from a last-minute financing choice to an influential mechanism for building investor interest. As it continues to disrupt traditional business financing; providing startups with unparalleled opportunities for financial growth, one thing is clear – crowdfunding is here to stay.