To face against the current crisis, and more precisely to face against the investment crisis that affects Start-ups, Small and Medium-sized Enterprises, a new way to raise funds has emerged, supported by the power of Internet: Crowd Funding. Start-ups and Small and Medium-sized Enterprises seeking investors have to knock at the doors of Business Angels networks/clubs or at Venture Capital firms. But the process of selection used by Venture Capitalists, and even by Business Angels, is difficult, time-consuming, and only a few percents of companies are financed. Crowd funding allows entrepreneurs to by-pass Business Angels and Venture Capitalists, by directly asking people to invest in their companies.
This way of fundraising democratize the investment process for private companies allowing all persons, even people with low incomes, to invest. Of course, Business Angels and Venture Capitalists are also welcome to invest. Another major benefit to entrepreneurs and companies is that many different kinds of projects can have access to capital. Even projects at seed-stage can have a chance to be financed.
The crowd funding was first, and is still, used to finance non-profit humanitarian, charitable or philanthropic projects, but also artistic projects. For instance, a French singer who interested none of the “big four” record companies, has been supported by the crowd funding web site My Major Company (in France) which is also called Sell a Band (in USA), and now he is a celebrity (in France).
How does crowd funding works? In theory, it is very simple. You have a project to finance, you present your project in a web site, and you promote your project to people and ask them to give you money! If people like your project, they will talk about it to their network, and then a viral funding process could start.
The kinds of funds that could be raised by crowd funding are:
It preferentially concerns non-profit projects. But some companies on the Internet offering a free service based on open-source software (freeware or shareware) can have significant revenues from donations by their customers (users).
- Loans (long term debt) or Credit (short term debt)
This kind of crowd funding is named Peer-to-Peer lending. Dr. Calvin Bacon has published two instructive articles about Peer-to-Peer lending, New Ventures: Is Peer to Peer Lending a Good Funding Solution? and Which P2P Lender Should You Choose?.
The investor bets his money on your project, and in the case of success, the entrepreneur pays-back royalties to the investor (a percentage of the sale revenues).
- Stock Sales
This concerns private companies such as start-ups, small and medium-sized enterprises seeking equity investors to finance their development. The goal of the investor is to obtain a capital gain after the sale of his stocks, and to receive dividends when the start-up has profits.
Donations, Loans, and Royalties can be used for entrepreneurs at a very early-stage of their project, before having a tangible product (good or service) to sale, even before the legal creation of the company. Stock Sales is a novelty. Indeed, we can easily buy (or sale) stocks of public companies on the Internet, but now, we can do it with private companies also.
To secure the financial deal, and to limit the risk of failure of the project, entrepreneurs and investors could work with intermediate companies specialized to manage the crowd funding process.
These companies analyze the project to be financed, the business plan, the market targeted, the products, the competitors, the management team skills and experiences, the patents, and other relevant information about the project. Then they provide regular reports of the activity of the funded company, and they secure the payment by Internet.
If you are interested in crowd funding, you probably want to take a look at some of the Internet sites regarding crowd funding. At this link, you can see a non-exhaustive list of crowd funding Internet companies. An alternate list is provided here.
Now, you have several novel ways to finance your project. Concerning private companies, if you are the CEO of a start-up, a small or medium-size enterprise, and if you need capital to finance an exciting project, why not asking your future customers and users to commit with you into your entrepreneurship adventure as partners? If your operational marketing is able to sell your products, it will also be able to sell your stocks. Selling stocks by crowd funding could be very powerful to turn your prospects into customers. If I buy your stocks because I have loved your project, I would like to buy for sure your future product, and I will convince my network to do like me! Why? If people buy your product, the prize of my stocks will increase! So simple!
To conclude, do not forget that you will fix the percentage of the equity that you will open to the market, and you will also fix the price of each stock share. This is a very important advantage compared to fundraising with Business Angels or Venture Capitalists who will harshly negotiate the percentage of the equity and the prize of stock before entering into your business. By crowd funding, you are the master!
About the Author
Ari Massoudi is a consultant for new business ventures specializing in innovative start-up and business development. A former scientist, he has a PhD in Molecular Cell Biology the University of Nice. Dr. Massoudi also writes a blog called Management of Innovation.