The rise of small business crowdfunding
2nd June, 2016
Small- to medium-sized businesses face a catch-22 when it comes to expanding or innovating. No matter how profitable their business model, few business owners have the available capital to scale up when they want to.
Bigger businesses might seek a loan or private investors, but smaller business may struggle to secure funding where banks are reluctant to offer or increase loans where there is a short earnings history or lack of assets.
As a result, business owners can find themselves in a position where despite wanting to expand or develop new products, they are still too small to secure the funding to help them grow.
Disclaimer: This information is intended to be general in nature. For information that is customised to your business circumstances, please seek specialist advice.
Enter crowdfunding
The Australian Law Bulletin’s Leigh Schulz defines crowdfunding as “the practice of raising funds through the pooling of relatively small financial contributions from a large number of investors to finance a business or to fund the commercialisation of a new product”.
Massolution, a global research and advisory board that works in partnership with industry expert, Crowdsourcing.org, publishes an annual crowdfunding report that estimates that $34.4 billion was raised worldwide in 2015.
Crowdfunding typically comes in three forms:
- Equity funding – where investors gain a share of your business or profits
- Donation funding – where people give you money to help you get your idea off the ground, often inspired by ‘product’ incentives, eg. ‘donate $100 and receive X’
- Product funding – where people give you money to develop new and usually innovative products
In most cases, crowdfunding occurs via an online platform. While there are lots of tricks when it comes to wrapping your head around crowdfunding, the first trick lies in knowing which platform to choose.
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Which crowd to run with?
Knowing which crowd to hang out with isn’t easy. In Australia, there are several well-known international crowdfunding platforms including:
The advantage of a major international platform is that they have a good track record when it comes to investors delivering on their pledges.
However, a range of Aussie platforms have gained great credibility too, including:
- Ozcrowd
- Pozible
- Venturecrowd
Each of these providers offers their own spin on crowdfunding, but the general concept is the same.
They provide a platform for you to offer your idea to the general public, tools so you can create a compelling message, and receive (and administer) financial support. In return, they take a cut.
Small business–focused platforms
The popularity of crowdfunding as an alternative funding source, has also given rise to platforms with a specific industry or business focus, as well as niche focuses – such as equity funding.
In ANZ, Sydney and Auckland based Equitise has been providing a crowdfunding platform for equity sales since 2014. Equitise has crowdfunded a range of small- and medium-scale share offerings, often designed to bridge the gap between angel investment and IPO.
“One of our early funding rounds,’” said co-founder, Johnny Wilkinson, “was for a successful travel app that raised AUD$250,000 on a $1.25 million valuation. What we enabled them to do was raise a funding round by seeking out a few hundred of their biggest supporters and selling them equity.”
Pros and cons of crowdfunding
Besides the access to funds, benefits of crowdfunding include an opportunity to test your market and a chance to build an online following and customer base.
But while clever crowdfunding can be a game-changer for savvy businesses, there is always inherent risk. If you don’t do your research and preparation, the results won’t match your expectations.
“Individual businesses need to ensure they choose the financing model that is right for them,” warns Mark Stone, Chief Executive Officer, Victorian Chamber of Commerce and Industry.
“As with any key business decision it is important to be aware of the benefits and risks, and ensure the model suits their specific business needs.”
Top tips include:
- Be prepared to invest time – researching conditions and developing a marketing campaign to make you stand out in the ‘crowd’
- Read the fine print – most platforms take a percentage of five percent or more, as well as a host of other conditions
- Pick your campaign type to match your need – all or nothing, percentage of funds or some other variation
- Don’t assume that the platform provides the crowd – bring your social network to the table
Unlike your bank manager, or private investors, crowdfunding contributors typically bring cash only. Not normally something you’d object to! But it means that they don’t care if you are struggling to deliver on the outcomes you promised.
Instead, if they are equity investors, they’ll expect returns. Likewise, you expect them to follow through on their dollar pledges.
Following the crowd
In 2015 Australians raised $68.6 million in crowdfunding alone and the trend is on the rise.
If you’re considering growing your business with crowdfunding, seek the right advice, do plenty of research and prepare to stand out in the crowd.