Crowdfunder is an online crowdfunding site based in Los Angeles, California. Just recently it was reported that Crowdfunder had closed on a $400,000 seed funding effort. This is an indicator of what can be accomplished through a concerted effort by a group of dedicated individuals.
It doesn’t matter what the amount is that you want to obtain. If you need R1,500 or 100 times that, contacting a crowdfunder organization is the first step you should make if you want to raise capital.
Unlike angel investment, in which one person typically takes a larger stake in a small business, with crowdfunding an entrepreneur can attract a ‘crowd’ of people – each of whom takes a small stake in a business idea, by contributing towards an online funding target.
Furthermore, crowdfunding can provide a very fast way to raise cash – several start-ups have reached their target in just a few days – and there are normally no upfront fees, keeping the process simple. Most crowdfunding platforms will look after much of the legal administration for you as well.
How Crowdfunding Works in South Africa
It is believed that, in many cases, this model is more successful than attempting to source the full investment required from a single individual or organisation. Furthermore, while some investors may be hesitant to invest in an unproven idea, crowdfunding provides an alternative way to source seed capital from a number of backers.
How much does it cost?
The majority of crowdfunding platforms won’t charge you for publishing a pitch, however they typically take around 5% commission when you reach your target – so you need to factor this into your investment total. If you don’t meet your target, you don’t pay a penny.
To encourage people to invest in your start-up, most websites ask you to offer staggered rewards (such as exclusive access to your first product or a five-year discount on your services) according to how much people invest.
In most cases, the crowdfunder is a potential client or interested party who likes your idea, not always a continuing investor. The idea is based on the idea of getting commitments from people who are willing to put up funds in the money pool.
How could crowdfunding benefit my business?
The main benefit of crowdfunding is that it creates a strong network of support for your start-up. With the equity model in particular, your investors are likely to become ambassadors for your brand – promoting it among their networks, tracking your progress and becoming returning customers themselves. They may also offer to lend a hand, for example by providing free legal advice or accountancy services.
If you promote your investment bid successfully, crowdfunding can also provide a powerful platform to raise awareness of your start-up. It gives you a newsworthy story to pitch to your local, and national, press (which may attract further new business). If you reach your target it also gives a clear message to potential clients, suppliers or future investors that you have the support of the public behind you.
Is crowdfunding right for my start-up?
Crowdfunding works best for start-ups that have a story to tell – whether a personal reason for starting the business, a passionate vision for what it could become, or a social mission.
People have to feel inspired to invest so you need to write a charismatic pitch to get potential investors’ pulses racing, or else display evidence of outstanding innovation.
If you have a mundane or complicated concept which the public will struggle to connect to, crowdfunding may not be right for your start-up. However, any business can succeed with the right pitch – the key to crowdfunding success is: keep it simple.
What if someone copies my idea?
There is always a risk of copyright infringement when you release your concept into a public domain, such as the internet, before you launch. However, the chance of someone copying your idea shouldn’t be any higher through crowdfunding than in the period between launching and your business becoming well-known.
How Well Received is Crowdfunding?
To fund a business idea, there are basically two options: 1) getting a bank loan or 2) by way of investors. Since crowdfunding is relatively new to South Africa, there are currently very few angel investors to choose from, but that is expected to change.
While a large number of venture capitalists reserve their investments for ideas already proven and generating revenue, crowdfunding success in other areas of the world makes it a potentially viable means of funding business startup as the idea catches on and there are more angel investing opportunities in South Africa.