Move over, angel investors, crowdfunding is changing the rules of the game
July 3, 2013 Editor 0
As banks rein in lending options for entrepreneurs, crowdfunding’s popularity is off the charts and continuing to rise.
By providing startups and social enterprises with access to the funding and exposure they need to launch or scale promising projects, crowdfunding is revolutionizing the way that entrepreneurs access funding.
Funding sites like Kickstarter, Indiegogo and StartSomeGood provide platforms for social enterprises to build and promote campaigns to appeal to huge pools of potential investors who have the choice of investing as little as $10 or as much as $10,000.
Just imagine: hiding in a pool of thousands of promising innovative ideas is one that could alter the lives of millions living in poverty. Choosing the right one is now in the hands of “the crowd,” who vote with their wallets based on infographics, statistics and campaign videos.
Telling the right story in the right way could mean the difference between success and failure for a small social enterprise. And according to recent statistics, entrepreneurs seem to be doing something right.
In April Massolution, a crowd-powered business, reported that crowdfunding websites helped companies and individuals worldwide raise $2.7 billion in 2012. That was an 80 percent increase from the previous year.
What’s more, Massolution predicts that in 2013 about $5.1 billion will be raised through crowdfunding platforms. For comparison, in 2012, the World Bank’s active loan portfolio reached $4.5 billion.
Crowdfunding has become so popular that it has even reached Northern Kenya via the BOMA Project. BOMA is helping women to start small businesses in their rural villages by mentoring them to ensure success. The BOMA campaign was launched on May 5, 2012 through WeDidIt and raised $15,000 in less than 10 days. Despite its humble start as a small crowdfunded project, the BOMA Project is now a U.S. certified nonprofit and registered Kenyan NGO and a poster-child for crowdfunding success.
If current trends are any indication, many more social enterprises will follow suit.
Interest in crowdfunding
Interest in crowdfunding drastically increased after President Obama signed the Jumpstart our Business Startups, or JOBS, Act last year. The goal was to legalize equity crowdfunding for accredited investors in the U.S. to alter the nature of early-stage startup fundraising.
“Because of this bill, startups and small businesses will now have access to a big, new pool of potential investors–namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in,” said President Obama at the JOBS Act Bill signing in April of last year.
Crowdfunding sites across the internet are doing just that. Early-stage startups who would otherwise have been financially limited are now able to pitch promising ideas to a huge pool of potential investors.
The Stanford Business School Center for Entrepreneurial Studies outlines three ways crowdfunding is changing how entrepreneurs and investors interact:
1. Entrepreneurs are now less reliant on initial financial backing from themselves, friends, family, and angel investors. This widens the field to include entrepreneurs from more humble means who would otherwise be disadvantaged when trying to launch a startup from scratch. But, this also means that entrepreneurs no longer face investors one-on-one. This means less critical feedback and potentially weaker business models.
2. More investors with smaller stakes. Now, almost any interested investor with a little capital to spare can help finance a project. While this diversification of the investor pool is good for management, investors are more susceptible to fraud or incompetence.
3. Many more ideas get funded. The pool of startups becomes more colorful–complex, simple, and niche ideas are more likely to get funded. Entrepreneurs no longer caught within the bounds of bank loans with a 5-7 year payback window can more easily think outside the box and produce unusual, potentially revolutionary ideas and products.
On the other hand, more ideas will be funded than can possibly return capital or meaningful social impact. This means that the percentage of successful business will be minute when compared to failed startups that sought funding from “the crowd.”
Follow the current crowdfunding journey of two social enterprises:
The Mwezi Light, a rechargeable solar lamp designed in the UK, and assembled and sold in Africa. The light will replace kerosene lamps with simple, easy-to-assemble technology.
SunWater, affordable solar-powered pumps for poor farmers in India. Concentrated solar power and special hose technology drastically reduces the cost of traditional solar-powered pump technology. SunWater aims to sell one million solar pumps in 10 years, ultimately helping 25 million people make better use of limited water supplies.Crowdfunding allows investors to fund promising ideas like Paul Polak’s SunWater solar water pump. Photo Credit: Paul Polak and team.Articles You Might Like:
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- Can Crowdfunding Work for Developing World Projects?
- Can Crowdfunding Solve the Startup Capital Gap?
- Columbia Business School student explains impact investing and its main players
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