Any entrepreneur today will tell you it’s tough getting funding for a new idea. Traditional forms of finance, including angel investors and venture capital funding demand prohibitive prototyping, proof of concept, and expensive research and development, before taking a massive stake in the equity of the company and demanding a say in how it’s run.

Introducing Crowdfunding

Crowdfunding makes it possible to bring a neat new idea to market with minimal development costs, while at the same time building a tribe of enthusiastic investors with a reason to become an ambassador for your brand.

Crowdfunding allows entrepreneurs and small business start-ups to approach the public for funding direct, cutting out the middleman. Through sites such as Kickstarter, Indiegogo and Wefunder people pledge small amounts (as little as $1) to support projects that interest them.

In return, rather than equity in the company, the project organisers may make available a scale of rewards; from listing the donor’s name on a roll of honour to special editions of merchandise or a personalised tour of a movie set. Projects may be new businesses, or an existing brand seeking to develop new markets.

What is Possible with Crowdfunding?

In February 2012 Tim Schafer, a Games Designer wanted his company, Double Fine Productions, to bring to market an adventure game, but he knew that to the big publishers the adventure game genre was over. “If I was to pitch an adventure game to a publisher right now they’d laugh in my face”. He decided to allow his fan base to buy into the game. Using Kickstarter, Double Fine asked for $400,000 (£250,000). Within nine hours the target was reached, and within 24 hours the total raised exceeded $1million.

The largest sites, such as Kickstarter and Indiegogo take a percentage of the amount raised by successful projects, while for unsuccessful projects funds are returned, or may be switched to another project.

Crowdfunding makes it quick and easy to discover and demonstrate what’s likely to find demand, without spending time and money on complex research and development. Pre-orders provide working capital to fuel initial production runs. Crowdfunding sites have protocols in place to handle the legal/administrative aspects, mitigating risk for both parties.

Government Stance

The legislative framework in the UK and in the US is increasingly friendly towards new funding models. In the US President Obama signed the JOBS Act (Jumpstart Our Business Start-Ups) in April and in the UK the Seed Enterprise Initiative Scheme, announced in the Chancellor’s Autumn Statement, seeks to relax restrictions on small investments in start-up businesses and provide tax incentives for investors.

Is Crowdfunding for You?

Crowdfunding works best for businesses with a story to tell that will excite the public; brands with passionate vision, a social purpose, a charismatic pitch or outstanding innovation. Anything complicated or mundane might struggle to capture public imagination.

Success in crowdfunding depends upon taking advantage of the social web to build a “buzz” and get funders to “buy-in” to your project. Studies have shown that successful projects actively engage their investors. Funders seek projects where they can participate, and when they do, they leverage their personal networks in the project’s favour, and can become long-term committed ambassadors for the business.

As Seth Godin, marketing expert and serial entrepreneur who crowdfunded his latest book, says, “Crowdfunding should be your last step, not your first. Dig your well before you’re thirsty.” Social networks and the interest and quality of the project are key determinants of success.