Crowdfunding

In my previous blogs I have discussed ways to raise finance; however this blog is on the concept of crowdfunding which is something a little different.

Crowdfunding is defined as “An open call, essentially through the internet, for the provision of financial resources either in the form of donation or in exchange for some form of reward and/or voting rights in order to support initiatives for specific purposes” Larralde (2010).

There are three types of crowdfunding and these include:

•      Civic Crowdfunding/Philanthropic Donations

•      Reward Based Crowdfunding

•      Securities Crowdfunding/ Equity-based Crowdfunding 

Multinational or larger firms may not deem this as an effective way to source finance as they can raise their finance through other sources as discussed in some of my previous blogs. However, it can be a very sufficient way to source finance for start-ups or new enterprises.

On the other hand, smaller business and entrepreneurs are liable to suffering from the financing gap; the problem that occurs when small to medium enterprises need funds, and would be able to use them productively if they were available, but are unable to access these funds through the financial system (Limming, 2011).

As start-ups or smaller business may find it hard to raise finance it seems crowdfunding would be beneficial to them as they essentially receive a 0% loan from their customers. This is because they appeal to customers or investors who would be interested in the project and are willing to invest in something they believe could be a success.

New websites have been created in order to help start-ups publish their project in order to get crowdfunding; these websites are called ‘kickstarter’ and ‘Indiegogo’ which allows users to provide content and interact with customers in order to gain finance.

The inputs of the individuals in the ‘crowd’ trigger the crowdfunding process and influence the ultimate value of the offerings or outcomes of the process. Each individual acts as an agent of the offering, selecting and promoting the projects in which they believe.

An example of crowdfunding on kickstarter is:

SWIMMING IN NEW YORK - +POOL

This New York project – featured on Goodnet earlier this year – raised $273,114 through Kickstarter to build a filtered, floating swimming pool in the middle of the river. The +POOL project began with the goal of cleaning the entire Hudson river, starting with one small piece at a time. After that it expanded - developing technology designed to filter the very water it floats on – and at the same time allowing New Yorkers to swim in clean river water for the first time in 100 years.

This type of crowdfunding was ‘Civic Crowdfunding/Philanthropic donations.’ Not all business ideas/projects are for generating profit and this project was originally intended to help the community.

However, companies must realise how much the venture will cost and they must set specific budgets in order for them to ensure they won’t fail. If companies have spent the funding customers have given them through crowdfunding and the company spends the money big problems could occur.

Crowdfunding is relatively new with many failed stories being told in the news, however looking at ‘kickstarter’ there are also many successful stories. By successful I mean companies have received the sufficient finance needed to start their business and employ their projects.

Finally, I believe crowdfunding is a sufficient and effective way for start-ups or small companies to raise the finance they need. It is also a great way to create a reputation and expose the brand image. However, companies see it as technically a 0% loan even though it’s not a method of raising finance, which can be a downfall to crowdfunding which start-ups need to be careful about.