Don’t Underestimate the Power of Crowdfunding

Illustration from Leardon.com

Of the many benefits the internet has bestowed upon us, the ability of entrepreneurs to tell the story of their proposed new business venture to the world via the web, social networking and specific sites where interested parties can come together is one of the most exciting advancements since Al Gore invented the internet (sorry Al).

Over the past ten years, the web has brought us several approaches to matching entrepreneurial ventures with funding sources. One approach created “micro-lenders”. No, these are not tiny Liliputian bankers with little vaults of small dollar bills. Micro-lenders provide funding in the form of small loans, typically less than $35,000, and come in a wide variety of types and motivation. They have names like ACCION, Opportunity Fund and ACE. Some act just like a small town bank, do their own underwriting and due diligence, and loan money at a specified interest rate, just as you might get at your local bank.

Others, like KIVA.org, allow people like you and me to invest small amounts, as little as $25, in worthy entrepreneurial projects around the world. It may help a small shop owner in Kenya purchase inventory, a delivery service in Ghana help in buying a used truck, or a merchant in Palestine funds to buy a generator. This is not a donation – it is a real loan made by groups of individuals trying to offer a hand up, rather than a handout.

Of course, the reason you’re not at your local bank is that you have already been there and were told that the bank does not loan money to new business start-ups. You were assured that if you came back in a few years with a track record of successful operations and the financial statements to prove it, the bank would be happy to talk to you then. But you don’t need the money two years from now – you need it NOW! You may find some assistance from your local Small Business Administration (SBA) or SCORE office. But an increasing number of entrepreneurs are looking to micro-lending and crowdfunding.

Simply stated, crowdfunding is taking your idea directly to the public through crowdfunding sites such as Kickstarter, Rockethub, and other similar project aggregators. You state your goal of how much money you need to raise and what you intend to do with the proceeds. You also tell you audience what you are willing to provide in exchange for a specified pledge. For example, an indie band might tap its fan base to fund a new album. What do the fans get? Well, a copy of the CD, maybe signed by the band, maybe a t-shirt, tickets to a show, and so on. Generally the “payback” is in the form of that type of exchange – you give me money, then I give you some of what that money helped to create.

Kickstarter is probably the best known crowdfunding site, but Rockethub has also grown exponentially since its inception just a few years ago. Each site works differently, but they all rely heavily on the entrepreneur to leverage their own social media and other networks to get the word out. So a band or artist with a substantial following would likely see greater success than one just starting out.

Don’t underestimate crowdfunding as a possible source for funding your new business, especially if you already have a crowd.

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