How crowdfunding levels the playing field

Posted by Elizabeth Harrison in Banking on 15 August 2014 - Elizabeth is a Senior Credit Analyst at checkmyfile.

It’s often been said that success in business is as much down to who you know as what you know and when you’re trying to get a business started, having a rich family and friends in high places can provide a handy starting block. As much as Alan Sugar can babble on about determination, entrepreneurial instinct and working your way up from humble beginnings, it sure does help to have a pot of cash on hand and an address book filled with useful contacts.

But what about those who don’t have similar resources and are struggling to secure funding? There are of course the traditional options, such as obtaining a bank loan, but this isn’t always so easy and as a result, alternatives such as crowdfunding are making their way into the mainstream.

IndieGoGo – one of the world’s first crowdfunding websites - was born partly of co-founder Danae Ringelmann’s frustration that ‘America was [only] the land of opportunity if you knew the right people’. Inspired to bring about change in the financial world after watching her parents’ struggles to grow and develop their own small business, Ringelmann came to the conclusion that the solution was ‘to put the decision and power back in the hands of the people, to democratise it’.

Sites such as IdieGoGo offer a platform for entrepreneurs and business owners in need of funding to come together with people from all walks of life, and all over the world, interested in investing. Ideas and projects are put forward along with a funding target and in return for their contributions, investors will receive a pre-arranged reward at a specified later date.

This may be something as simple as early access to the finished product or as tempting as a percentage of the eventual profits. The risk to the investor is often low - as contributions come from a large number of people, each contribution is a smaller sum. And you won’t end up losing your money in a project which will never come to fruition as funding is only received once the full amount is raised.

Although it is estimated that only 10% of proposals ever reach their targets, even this can be viewed in a positive light. Support for an idea in its early stages gives a good indication as to whether that particular product or service will find success. The level of support at this early stage can determine whether or not it’s worth pursuing the idea before huge sums of money are invested.

Since crowdfunding reared its egalitarian head, it has proven an increasingly attractive funding option for individuals and small firms who have struggled to raise funds by other means. But it’s not just cash-strapped hopefuls making use of this type of funding, Hollywood directors are getting in on the action too.

Simon West, of Tomb Raider and Con Air fame is hoping to raise £1.8m for his next film using the equity crowdfunding site SyndicateRoom. His previous films have made millions of dollars, so the odds may seem appealing to investors who can expect their capital to be repaid with a share of the profits, but the risk is high. Despite West’s aim to ‘make an instant classic’ there are no guarantees the film will enjoy success.

If you fancy joining the glitzy film industry the minimum investment for West’s film is £1000 but those with a bit more cash to splash may decide to invest £90,000 and get the chance to appear in the film as an extra. (Bit of a hefty increase considering extras normally receive pay rather than having to invest in the film…)

From West’s point of view you can certainly see the appeal of choosing this type of funding over another as it allows complete creative freedom. And it’s a good way to secure funding for new, previously untested ventures at a time in the film industry when a sequel is considered a safer bet than a new film. Many companies are less inclined to take risks on original ideas preferring instead to remain within the safe confines of a concept with known popularity. And from a financial standpoint this is understandable but it does mean that in terms of creativity things can get a bit stale.

The beauty of a crowdfunded project is that support in the form of finance indicates a genuine market for the product or service. The investor believes in the idea enough to put their money where their mouth is so chances are they have a real interest in the projects and may also be a future customer. All of which ensures that consumer tastes are catered for and quality and innovation come to the fore.

It comes back to Ringelmann’s democratisation of finance. Ideas are being judged on their merit rather than financial backing being received as a result of who you know. Who needs that pot of gold and address book after all…?!

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