An Introduction to Crowdfunding

Over the coming months the Technoport Playground will host a series of articles, interviews, and discussions around the topic of crowdfunding.

There’s no doubt crowdfunding is a buzz word, but there’s also no doubt it’s changing the way small businesses can get funding. According to research firm Massolution, US $5bn will be raised through crowdfunding in 2013.

A trip back in time

The concept has its roots way back before the days of social media, and even before computers. Way back before any of you dear readers were even born! To learn the roots of crowdfunding, we must travel back to late 19th Century America.

Journey with me…

Statue of Liberty

It’s well known that the French gifted the Statue of Liberty to the United States, but what’s less well known is America had to find $300,000 to pay for the base on which the statue would be constructed.

The American committee responsible for raising the funds approached newspaper owner Joseph Pulitzer to help launch a campaign. Through the press, they invited citizens to donate whatever they could afford to help fund the base, and in return each donor would receive a miniature replica of the statue. The plan worked, raising $100,000 in five months.

Cutting out the middle man – to an extent

The internet – and specifically social media – has opened up the world of funding for startups and innovators. No longer are entrepreneurs forced to dress up in suits and go cap in hand to VCs or bank managers.

If someone has an idea, or better still a prototype, they can instantly validate that idea with cold, hard cash. According to Fundable, the average successful campaign lasts around 9 weeks and raises US $7,000.

At Startup Weekend, participants are taught they must validate their idea as early as possible. With crowdfunding, all an inventor needs is a prototype (or perhaps just a drawing!), a YouTube video, and some compelling copy to start a campaign.

Of course at some point in a startup’s growth, VC money will be required. But that money will flow so much faster after a successful crowdfunding campaign that validates customer demand.

Equity crowdfunding – the future?

In most campaigns, donators are rewarded with early access the product or service in question, sometimes with additional benefits.

Following on from the success of this donation-based model, bigger businesses are jumping on board the crowdfunding train and planning an equity-based model. There are legal hoops to jump before this approach will become commonplace across borders, but it looks a surefire bet.

Where this all takes place

Perhaps the best known crowdfunding site is Kickstarter, although it focuses on creative projects. Rival site Indiegogo has grown massively, mainly because of its wider remit. Meanwhile Crowdfunder bills itself as crowdfunding for businesses, and is home to $500,000+ projects looking to attract serious investment.

For those interested in the equity-based approach, check out FundedByMe, who claim to be Europe’s fastest growing crowd investment platform.

I’ve been an interested observer of crowdfunding for several years but have never taken the plunge with an investment.

Have you?

Photo credits: David Muir & Chaymation