Crowdfunding, the latest funding innovation

Have you ever dreamt of making your own movie? Building an interesting toy? Designing a custom light for your bicycle? Or putting together a pair of new augmented reality glasses? We all have plenty of ideas that don’t go too far due to the paucity of capital, access to resources, or even a lack of confidence. Online funding platforms are now making these small dreams grow big and real. They are not only assisting in raising money but also in product development and market research.

Crowdfunding is the latest of the funding innovations. In contrast to the traditional fund raising methods that focus on wealthy individuals or corporations, crowdfunding is the idea of getting people to collectively pool their resources and fund a product, venture, or project. It has become a powerful mainstream tool that can disrupt the innovation and creativity pipeline by eliminating the intermediary and raising small amounts of money typically via the Internet. It was made popular in 2009 with the launch of Kickstarter that enabled startups to raise funds by pitching to customers and validating their product ideas. There are now over 450 such platforms, each different in the services they provide.

There are two main types of crowdfunding – reward and equity-based. In reward-based model, entrepreneurs sell a product or service to raise funds without incurring debt or giving up equity. For example, on Kickstarter, backers are rewarded with gifts or early access to products they support instead of equity in the company. In the equity-based model, the customer receives shares in exchange for the money invested. Unlike traditional models of fundraising, where the intermediary takes a big percentage, crowdfunding platforms take only a small cut and allow the user to retain ownership and rights over the business idea. It makes investing more personal and impactful since a knowledgeable investor has a view of all the opportunities to make an informed decision.

Milaap, Kickstarter, Indiegogo, Crowdfunder, CircleUp, Seedrs, crowdcube, RocketHub, Crowdtilt, and Appbackr are all platforms that help entrepreneurs raise equity from the masses. They vary not only in the types of projects presented, but also in their fee structure, geographic coverage and whether you can keep what you raise or lose everything if you don’t reach your fundraising goal.

Despite the significant growth in crowdfunding, succeeding in raising funds isn’t as easy. Most campaigns last for 30 days and need several months of planning and preparation to showcase the digital creativity and innovation, plead to the investors, and raise funds. Constant involvement to keep the original backers happy while recruiting new supporters is quite time consuming. For a successful campaign, a good idea, a recurring engagement with potential funders, a clear vision, and a sincere belief in a product are critical. If the effort is not cohesive, the whole campaign could fizzle out damaging the reputation of the startup and founders.

Some of the successful ideas that have panned out of crowdsourcing include, Form1, an MIT led group that developed an affordable 3D printer for the masses, the Veronica Movie project that brought the famous TV show to movie form, Pebble the smart watch with wearable technology and Bluetooth, Ouya the android based gaming console, Oculus Rift the virtual reality headset, Arkyd, the space telescope, and Bragi, the wireless headphones. These are a few in the technology domain that were successful in raising several millions of dollars and there are several in the arts domain as well.

Crowdfunding platforms minimize the tedious fundraising process and create an opportunity for startups to engage with their customers. Customers can monitor the production process and provide feedback on the potential of the company while startups can focus more time on the day-to-day business activities. Other cons of this model include the possibility of investors being easily defrauded since the hype factor could make the crowd behave irrationally and throw due diligence to the wind. On the other hand, complex, niche, and crazy ideas that would otherwise never see the light of the day could get funded.

The Internet culture is based on sharing and collaboration across the digital fabric. Crowdfunding has leveraged the advancements in Internet, security, financial planning, and social media to provide more people with access to this type of investment. This has made the investment process more democratic with the small investors having an equal opportunity as the big investor.

In the coming years, crowd funding will surely leverage the absence of geographical boundary restrictions, increase the total amount of funding available, influence the rate of invention, and empower innovators across the world. It is expected to substantially increase over the next few years and transform the rich get richer maxim into the smart get richer paradigm significantly benefitting the dreamers everywhere.