Tweak Your Biz » Technology » Crowd-Funding – Start-Up Businesses Need To Take Note

Crowd-Funding – Start-Up Businesses Need To Take Note



Crowd funding is a game-changer for entrepreneurs the cash-strapped world over. It could be the difference between failure and success for your start-up idea. In the last two years I’ve had considerable exposure to the world of crowdfunding and have been lucky to meet a number of crowd-funding CEO’s and experts. I have seen first hand how effective it can be and not just for raising finance, but for marketing, business administration and in a host of other ways. In the piece below I’ve explored how beneficial crowd-funding could be to your start-up’s future….

My inner geeky child does cartwheels when I come across new technology or applications that change the world or the way we live.

Massive examples of world changers are how Google changed the way in which we find information; how Facebook changed the way in which we interact with our friends and family; how LinkedIn has changed the way in which business is conducted. Or my favourite of the day, how the iPhone has changed the way in which I have access to everything I need when I’m on the move.

Traditional funding is dead and gone, its with O’Leary in the grave!

Traditionally as an entrepreneur with big idea’s you would have slaved away developing your business idea, if you’re smart you’ll have created a business plan before creating your product (software or a physical hardware prototype). Then after all that hard work, you’d have to file for patents, trademarks or copyright protection if applicable. Once your business plan and some form of proof of concept are complete and ready, you may have gone and talked to your bank manager about what they could do for you – after all, for the last 6 months you’d been working flat out, and you were just about out of money.

They will offer you a loan application form in all likelihood, and perhaps a fake smile because they know that with their credit so tight and your lack of proven track record it’s unlikely “in this economy” they will loan you money. You may have explored angel investment or tried to approach Venture Capital funds. Neither would have been interested (in most, not all cases) because your business to them is un-proven. You don’t have customers yet, hell you mightn’t even have a product yet! IF your business idea and the team behind your business, interests them enough to compel them to become involved, the chances are you would have to give up a huge equity stake in the company.

And so a catch22 situation is created: You need funding to get your business up and running so you can make money, but to prove its a sound business you need a product, customers and revenues. Now you are in a state of inertia, because you don’t have customers to significantly provide market feedback on your product.

Prepare yourself for abject poverty!

I was at an entrepreneurial innovation seminar about a year ago in Dublin and one of the speakers, who is a serial entrepreneur got up and said: “For all of you in the audience today who are thinking about becoming entrepreneurs, prepare yourselves for abject poverty”

This traditional funding paradox I can only imagine has led countless entrepreneurs to abandon their dream and surrender themselves back into paid employment in order to once again pay their bills and avoid said poverty.

The good news is that the “Social Media Revolution” has fundamentally changed the world as we know it and we are only now starting to see some of the butterfly efffects. Now it’s possible to leverage your “network” to raise the capital you need to break through this inertia and get to a stage where your business is up and running and making you money. The best part of all is that in some cases this can be achieved without giving up any equity in your company.

Enter Crowd funding stage left.

What is Crowd-funding?

To explain the basic concept of how and why it works, we need to look at some numbers:

Let’s say in your (hypothetical) business plan you’ve surmised that it’s going to take you €20,000 to get setup, and get a working prototype produced. You have forecast that you are going to be able to sell 1000 units in year 1, and your product is going to sell for €40 per unit. If your forecast bears fruit you will have doubled your money and made a gross profit of €20,000 in year 1.

BUT, you still need to come up with the initial €20,000, to get the ball rolling. The odds are that your bank isn’t going to give it to you. The numbers are far too small for a VC (Venture Capital) fund to talk to you, and besides it’s much too early in the process for them. You may find an Angel investor who will look at your business plan but given that you haven’t even developed a prototype yet and you are an unknown quantity, if you can secure angel investment the price in equity will be extremely high.

With crowd funding you use a platform to list your business idea, how much investment you require and a video of you talking about what you are going to do, your product and its features/benefits. You also list the different ways in which people can get involved with funding you.

Below is an example of possible deals you could offer people willing to pledge money to fund your project:

€30 – Autographed 1st edition of the product
€50 – 2 autographed products, and a product branded t-shirt
€100 – 3 products in a hamper basket of merchandising (t-shirts, mugs, etc)
€250 – Perhaps there is a more unique or higher quality version of your product you can offer
€500 – etc etc

In the above example, you would need to find between 40 and 660 people willing to pledge an amount of money to your project. Most crowd funding platforms work on a mechanism whereby project owners get no funding unless their target milestone is reached (in our example this is €20,000). This mechanism is deliberate and is to guarantee a concept known as “The Wisdom of the Crowd” (ref: The Crowdfunding Revolution), which is there to protect funders.

Raising your funds isn’t the really powerful part!

So you’ve made your video, listed your project on a crowd funding site, worked your social media so that your friends, family, followers and fans have all given you a small investment. You’ve reached your funding milestone which means you have a green light and you can begin the real work.

That’s going to be a big day for you, and rightly so, but what a lot of entrepreneurs don’t realise is that there are two MASSIVE hidden benefits to raising your seed capital this way.

Firstly – you have now recruited an army of brand advocates for your new product. When you have completed it, you will have somewhere between 40 and 700 people itching for the chance to talk about your product favourably online.  They are invested in the product, they want to see it become the massive success they already believe it will be, which is why they invested. Normally speaking it would cost you an arm and a leg to generate marketing buzz online like you will be able to create, for free, around the launch of your product.

Secondly – the exact moment you hit that funding milestone and you have a “crowd” of people who have voted with their wallets (and purses!) that they think your product is awesome, something almost magical happens. At the exact same moment, VC funds and Angel investors will sit up and pay attention to the opportunity you now embody. You have not only just gotten funded, you’ve also achieved market validation, in principle at least!

Have you ever considered using crowd funding to get a business idea off the ground? What platforms did you try?

Image: “cheering crowd happy clapping their hands/Shutterstock



The Author:

Neil is passionate about Inbound Marketing, Social Media, SEO and good Website Design. He works with businesses and organisations all over the world to help them be more effective online. Neil is the Managing Director of Lime Canvas a website design and inbound marketing agency and he organises the Dublin WordPress meetup group. Connect with Neil: LinkedIn - @neilsisson - Google+ - Facebook http://www.LimeCanvas.com

Add Your Comment

  • http://twitter.com/#!/antonmccarthy Anton McCarthy

    Hi Neil,

    Great article! I think crowdfunding is an amazing concept – and you only have to look at the likes of Kickstarter to see how it has taken off like a rocket. The point on market validation is a very good one – one of the biggest challenges or concerns starting out with a new venture is – will the market take to it? Will my idea capture people’s imagination? Testing the crowd through this model is as important for initial feedback as it is for pure funding itself.

  • http://www.tweakyourbiz.com Niall Devitt

    Hi Neil, Great post and explanation of what crowd-funding is all about. I love the the concept of crowd funding but wonder if it lends itself more to certain types of businesses/ideas. But as I think about it again, this may be down to the fact that it hasn’t really reached more main stream businesses just yet. 

  • http://neilsisson.com/ Neil Sisson

    Hey Niall, adoption seems to have been primarily in the creative space to date, however there is some huge money changing hands in some market niches. I’m involved with a mobile application development funding crowdfunder called AppsFunder.com and they are funding the development of paid and fremium mobile apps.

    Here in Ireland there’s a company called Fundit.ie that seem to be funding everything and anything. There are also a number of debt/equity funding platforms out there which are more traditional in approach, where each member of your funding crowd actually own a piece of your company. Not sure I like that model as much.

  • http://neilsisson.com/ Neil Sisson

    Thanks Anton – yeah I agree completely and that’s backed up by feedback from a number of VC funds and angel investors that I’ve spoken to. Getting funded definitely skews the risk calculation in favour of the entrepreneur and while it in itself isn’t the holy grail, its a massive achievement and step in the right direction.

  • http://www.encouragingexcellence.ie/ Mairéad Kelly

    Brilliant post Neil, you explain it so well.  It is a lot like the likes of the charity funding for small businesses in third world countries for example http://www.kiva.org/

    One question; does that funding ever have to be repayed or is it basically an advance payment on a product/service that is being developed?

  • http://www.encouragingexcellence.ie/ Mairéad Kelly

    Brilliant post Neil, you explain it so well.  It is a lot like the likes of the charity funding for small businesses in third world countries for example http://www.kiva.org/

    One question; does that funding ever have to be repayed or is it basically an advance payment on a product/service that is being developed?

  • http://twitter.com/#!/antonmccarthy Anton McCarthy

    That’s great to hear. I love the concept all round and it’s so encouraging to see it flourishing – especially in the current economy – as so many people have great ideas but just don’t have the funds to see if they are winning ones. Have been checking out AppsFunder too after your last post – one to watch.

  • http://twitter.com/xcelbusiness Helen Cousins

    Love this post Neil, it’s nice and practical and comes from the real world :) It’s one thing to have a great idea, but quite another to develop it, fund it and get paying customers. I particularly like the added benefits you list at the end, start-ups need advocates and having the drive an imagination to find your own funding sources says a lot about an entrepreneur. If a start-up could target a “crowd” that would be a form of product endorsement as well, so much the better.
    ~ Helen

  • http://neilsisson.com/ Neil Sisson

    Thanks Helen.

  • http://neilsisson.com/ Neil Sisson

    Hi Mairéad, thanks for your comments. To answer your question, there has been an explosion of crowd funding platforms in the last couple of years. There are a lot of them out there now and there are a number of different business models they operate under.

    I’ve seen platforms that require you give your Funders a chunk of the equity of your business. Others just work on an almost voluntary donation system where the Funders don’t receive reciprocal value for their investment (some of the arty ones work like that). 

    The best ones in my view are the type that operate on the model I outlined in my example – i.e. the business owner retains 100% equity but gives his/her Funders a Return on their Investment. It doesn’t have to always be cash either, it could be cool stuff or kudos or membership to an exclusive “club” of supporters.

  • http://www.appointmentsetting.com/ simonswills

    Excellent post and description of what crowd-funding is all about. I really like the the idea of crowd funding but wonder if it gives itself more to certain kinds of businesses/ideas. But as I think about it again, this may be down to the truth that it hasn’t really achieved more major river companies just yet. 

  • Arjun Rampal

    It sounds really interesting. Very good article giving good insight into the concept and its structure. A must read for those starting the business.

  • http://charter-tv.spruz.com/pt/Charter-TV-for-cheap-deals.6-25-2012/blog.htm Patrick Hudson

     The concept is good but i doubt its success. How many are ready to put their money into others business and that too without any major profit for them. But the idea of doing this kind of funding is interesting.

  • John Austin

    If you want to find ethical companies that use their crowdfunding funds for the good of society, there are plenty out there. They are called double bottom line companies. I contributed to a perk for one in Southern California. They have a program to contribute $600,000 in product and services to the medically needy if they reach their $200,000 goal. As a business person, I know this is easily doable because of the huge margin companies make on manufacturing. Check them out at http://www.indiegogo.com/projects/487492/. There should be more socially minded people like these folks.