One of the most powerful new sources of start-up funding is coming to town. Yet, many may wonder what crowd-funding is and what the benefits are to their business if they use it.
People are raising millions of dollars, online?
Crowd-funding is a relatively new way of raising capital for a new venture or project. It essentially relies on attracting micro-donations or pledges from large numbers of people online.
According to a report released last year by Massolution, individual donors pledged US$2.7 billion across more than 1 million individual campaigns in 2012 – an amount that is projected to exceed US$5 billion in 2013.
Crowd-funding works because it cuts out the middleman and exposes funding projects directly to a large volume of people who may be interested in investing in your idea or project. So while the average individual investment or donation may be relatively small, the collective contribution of a large number of people can often lead to a substantial amount of capital being raised – quickly, and cheaply.
Two models of crowd-funding
The first model of crowd-funding is what's called donation-based funding. This was the original funding model where funders collaboratively donate to achieve a funding goal for a project in return for products (similar to pre-orders), perks, awards or a combination of the above. This has been used to fund everything from 3D printers to music albums and computer games.
The second model is investment crowd-funding, where businesses sell equity. Individual investors who fund projects through this model become shareholders with potential for financial return. Crowd-funding investors are able to spread their money across a number of funding projects, hence diversifying their portfolio and reducing risk.
In New Zealand, equity based crowd-funding is not currently permitted because it breaches current securities legislation. However new laws to be introduced in April 2014 will relax such restrictions, paving the way for Kiwi entrepreneurs to raise money in this manner.
Getting in on the action
Crowd-funding is ideal for helping companies in the 'most critical stages', after they have received money from friends and family but before they have enough sales to be attractive for bank loans or equity investment from angel or venture capital investors.
There are different types of crowd-funding sources for different types of businesses or R&D projects. Below are some of the popular crowd-funding platforms you may consider for starting your next project.
US-based platform Kickstarter is launching in New Zealand and Australia from 13 November 2013. The site is one of the largest platforms for crowd-funding. Kickstarter crowd investors are interested in creative projects for donation-based funding. Such projects can range from creative R&D projects to music albums.
Indiegogo is available to New Zealand businesses and allows donation-based fundraising for almost anything (except investments) from anyone. For example, funding projects can include music, hobbyists, personal finance needs and charities.
Crowdfunder is a platform for businesses with a growing social network of investors, tech start-ups and social entrepreneurship.
AngelList is another popular funding platform for tech start-ups. AngelList has a large pool of accredited investors and institutions, and there has been a growing number of successful tech start-up deals often above the million dollar mark.
Look before you leap
However as with all things there are some important issues to consider before diving straight in. With the popularity of crowd-funding platforms, it can often be difficult to promote your project and have it seen by potential donors or investors. Therefore the success of your funding project will often hinge on how well you promote your project to entice investors.
It's important also, to carefully consider the implications of disclosing your idea or project before you have taken advice on how best to protect any intellectual property you may own in it.
For example, it's often a good idea to trade mark important business or product names in key markets before you disclose them to the public. Similarly, innovative or novel products or services may be protected by other forms of IP rights, such as patents or design registrations. So we recommend checking with your local patent attorney prior to launching your crowd-funding campaign. After all, when you do get to market you'll want to be sure you can maximise the value of any IP you've created along the way. And the best way to do this is to have a clear IP strategy in place from the get-go.*This was originally posted on The Icehouse website.