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The Pros and Cons of Crowd Funding Your Start-up Business

Published on May 25, 2015 4:24 pm, by

There are several options for those searching for start-up funding: save it (safe and highly suggested); borrow it, or source it from a crowd. As websites like Kickstarter  and Gofundme grow in popularity, there’s never been a better time to consider crowd-funding as an option for your new business.

What is Crowd Funding? 

Crowd-sourcing is asking a crowd of people to donate a defined amount of money for a specific cause or project in exchange for various rewards.

There are three types of crowd funding;

  1. Equity-based crowdfunding is asking a crowd to donate to your business or project in exchange for equity (sometimes called Angel Investors).
  2. Donation-based crowdfunding is asking a crowd to donate to your project in exchange for tangible, non-monetary rewards such as an e-card, t-shirt, pre-released CD, or the finished product.
  3. Debt-based crowd funding is asking a crowd to donate to your business or business project in exchange for financial return and/or interest at a future date.

The crowdfunding model is fueled by three types of actors: the project initiator who proposes the idea and/or project to be funded; individuals or groups who support the idea; and a moderating organisation (the “platform”) that brings the parties together to launch the idea.

The global strength of crowd funding
Today, the crowd funding industry is over $5.1 billion worldwide. “Backers” can be encouraged to contribute through the offer of incentives and rewards based on amount they donate.

How to go about it… 

So you have the business plan and the belief that you can do it… now you just need the dollars?

(Well actually, good project planning and management is critical so you should also probably develop a detailed project budget with a contingency amount first!).

Where do you Crowd Fund? 

There are a number of established crowd funding platforms enterprising entrepreneurs can take advantage of.

Some of the best international sources for safely asking and offering financial donations include:  KickstarterIndiegogoRocketHub, and Onevest. Closer to home, popular platforms include: Mycause, Ozcrowd,  Pozible, Venturecrowd.

While each site offers their unique approach, the general concept is the same – opportunistic operators introduce their start up idea to the general public, and aim to create a compelling message that readers will be drawn towards, and financially support.

Pros and Cons

According to Australian business website  there are both pros and cons to this method of accruing money.

There are some real-time benefits in funding your business this way;

  • a  ready made customer base already committed to your product
  • the opportunity for you to interact directly with your customers (who are also your investors) and gain vital feedback while your product is being developed and tested
  • free word-of-mouth marketing for your product through your backers
  • Full-ownership of your business remains with you.
  • Lower commitment and risk (if you don’t reach your goal, you don’t have to commit).

Is it for you? Consider this before you jump in…

  • no guarantee you will reach your funding goal in the set time
  • the need to campaign and present your product well to encourage people to fund it
  • the need to spend time interacting with your backers and providing them with updates on your product and business development
  • having to compete with other businesses seeking crowdfunding for their ideas and products.
  • potentially high service and transaction fees

While there are obvious considerations to be made on both sides of the debate, the power of crowdfunding can be evidenced through the success of several start-ups. According to BRW, the top seven biggest Australian crowd funding projects of 2014 featured a number of causes ranging from creative (Ninja Blocks raised $702,937 to build a device which allow you to connect and control internet-connected devices through your home network ) to charitable (The Ride: East Coast, secured $105,380 for a Jet Ski ride from Sydney to Cairns to raise awareness for mental health charity headspace and to film a documentary).

However, even personally motivated projects received good levels of support. One of the most popular being John Gorilla – a colourful and quirky cafe in Melbourne which owner Joanna Wilson helped build after pledgers on Pozible contributed almost $7000 for her solo venture.

So what do we think about CrowdFunding? 

In an era when more small businesses are struggling to stay afloat, crowdfunding aims to empower entrepreneurs through the investments of other individuals – giving the opportunity to showcase their start up to the rest of the world. Crowdfunding is big business – but it can work for your small one and makes it okay (just this once!) to “follow the crowd!”.

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