Lots of people have an idea for a new business but lack the funds to get it off the ground. One traditional way of raising new company start-up money is to raid your own savings or borrow money from friends or family. However many people are not willing or able to do this and without some basic capital of your own, or a house to act as security, it can be hard to get a bank loan.
In recent year a new option has begun to emerge through crowdfunding. Crowdfunding is like a Dragon’s Den pitch that is open to the public. People with a business idea can put a pitch up on a crowdfunding website describing what their new venture is, how much money they want and what the investors will get in return. Users of the website can then choose to give as much or as little money as they like. If target set by the new company is reached they get their funding. If the target is not reached then the investors get their money back. Unlike Dragon’s Den through, the investor does not normally get a share of the company. This is largely because of investment regulations which place limitations on how businesses can buy and sell their shares. Instead they might get priority access to the new company’s services or limited editions of their products.
Crowdfunding has proved to be popular with Kickstarter, who helped to pioneer the model, having raised $200 million since they launched in April 2009. This total was achieved through 1.8 million people funding 20,000 projects as diverse as an urban farm, an online magazine and numerous films and works of art. One of the most high profile success stories for Kickstarter has been a company called Pebble who went on Kickstarter looking for £100,000 to produce their new high tech watch. They hit their funding goal within 2 hours and ended up raising $7 million.
At the moment many of the crowdfunding platforms are American but Kickstarter and Indiegogo allow projects and investors from around the world to participate. Meanwhile there are a range of UK based crowdfunding platforms in the works with seedrs and crowdfunder being leading examples.
The potential of crowdfunding for business start-ups has been recognised by President Obama who recently signed the Jobs Act. This will allow American start-ups to sell up $1 million of shares through crowdfunding. Some people have raised concerns that this will leave business start-ups and investors open to fraud. As with any business or investment opportunity people will need to be aware of the risks and invest carefully. Crowdfunding may not yet be a mainstream way of raising money for new businesses but if you have an interesting or quirky product it can be an excellent way to get prototypes and other proofs of concept under way.