Sometimes called “crowd financing” or “crowd sourced capital,” crowd funding provides the collective cooperation of people willing to pool their money to support projects, activities and businesses that interest them.
How Crowd Funding Works
Basically, you present your idea to the community, and interested parties may support all or part of the investment you need. Members are typically not professional financiers, and often will provide only a small percentage of what you need. The amount of money given vary, and may be as low as $1 or as high as $2,500 or more. Your goal then is to find more of these interested people willing to help you come up with the amount that you require for your business or project.
Most of the supporters will give you their pledge because they believe in your project. But to entice people to support you, you need to think of what you will provide the contributors in return (often based on the amount they provided).
The leading crowd funding network today is Kickstarter.com, where majority of projects are creative endeavors (from art to brochures to film). One of their recently successful project is the DIY Desktop CNC Machine, which allows “hobbyists or evil scientists, small-scale manufacturers or budding inventors, the power to go from on-screen design to precision-machined product in a few mouse clicks.” This project’s goal is only to raise $15,000. But it has attracted 277 backers who pledged 348% more of the stated goal, bringing total pledges to $52,200. Those who pledged anywhere from $5-$11 will receive a thank you note and a small commemorative plaque, but those who pledged $2,500 or more will receive an operational machine.
UK’s CrowdCube.com http://www.crowdcube.com , on the other hand, focuses exclusively on entrepreneurs and businesses. Investors are not rewarded with thank you notes here; instead, they get equity percentage in the venture. Investors will get equity in the business through shares. However, the site is still new and very little projects seem to be in their pipeline.
PeerBackers.com http://www.peerbackers.com also focuses on entrepreneurs. Instead of giving away equity in exchange for investment, those who pledge will typically receive the resulting goods or products from the project.
Before considering whether crowd funding is a good approach to raising the needed funds for your business, be sure to read the rules carefully. Study the pitch and types of projects that are successful in raising the money they need.
However, it is important to be aware of the risks involved in soliciting in crowd sourcing sites. The biggest risk is the complete disclosure of your idea. Whether your pitch is successful or not, your idea will be out there and there is the risk that it can be copied and developed by better-funded competitors. Also be careful of the government regulations when issuing shares of your company to other parties, as well as the tax implications of the financial support received from crowd sourcing sites.
For a successful crowdfunding campaign, read the article 40 Tips on How to Use Crowdfunding to Raise Money for Your Business.