Crowdfunding Matches Good Ideas with Online Investors

14 March 2013

Do you need a business loan? Can you convince strangers in the social media world that your construction plan is a wise investment? Through crowdfunding, you can take your ideas to a global audience and harness their collective support to help you meet your goals.

With hundreds of online platforms, crowdfunding projects range from humanitarian relief projects and artistic endeavors to tech startups. Made possible by mobile and Internet technology, this relatively new tool for microfinancing also helps to address the challenge of getting money into the hands of people who may not be able to rely on more traditional sources, such as family or local communities, for capital investments.

"We're on the cusp of a global movement and ... this is an opportunity to disrupt the way in which small businesses are financed," Sherwood Neiss, co-founder of Crowdfund Capital Advisors, told a State Department webchat March 7.

Jessica Jackley, who is co-founder and chief marketing officer of the nonprofit crowdfunding platform Kiva, said thousands of people are getting funding through her organization every day, at an average of $400 each.

"You see individuals making amazing things happen in their lives and in their family's lives. They are slowly lifting themselves out of poverty, thanks to a few hundred dollars in loans. We see goat herders, seamstresses, farmers, small kiosk owners, small restaurant owners, people raising chickens and all kinds of other animals. We see people doing very hard work every day and ... doing everything right. All they needed was access to this small amount of capital," she said.

Jackley said there are now many options for attracting contributors, including the pre-sale of inventory at discounted prices and opportunities to purchase equity in a business, along with more traditional cash loans and donations.

For example, in April 2012, the startup company Pebble Technology began a crowdfunding campaign on after it failed to get enough money from business investors to produce its smartwatches. With the initial goal of raising $100,000, it attracted investors by offering them significant discounts on the watches once they became available and was able to raise more than $10 million in one month before it ended its campaign.

The key to success is to first decide upon an achievable business goal, whether it is purchasing a piece of equipment, hiring a staff member or obtaining office space, and then figuring out how much is needed to achieve that, Jackley said.

"I see the best results and I see the most success happen when people have done a lot of the hard work and they are asked the tough questions up front" before asking for investors. "They know why they're [asking] for what they're asking, and they know what they want above and beyond the money," she said.

Neiss said it is important for those wanting to raise capital through crowdfunding to understand the need to convince contributors through communication and transparency that the business plan is sound and tell them how proceeds will be used and how decisions and priorities were made.

"Taking money from anyone is a very serious proposition and it comes with a great degree of responsibility. In exchange for that money, you have to go through disclosures," he said.

"You have to make sure that investors see the opportunity, but understand the risks associated with it. And you have to look at the crowd as not just money but as people who bring knowledge and wisdom that can help you actually get your company to the next level."

By offering equity, entrepreneurs will lose full ownership of their business, but they may not be in a position to pay lenders a fixed rate of return on their investment when they are first starting out, he said.

In addition, "when you give someone an actual piece of the pie or you give them the opportunity to own something within that business, they have a vested interest in the success of that company," Neiss said. In fact, he said, they may become marketing agents for the company and bring it more attention and publicity through free advertising.

Jackley acknowledged a "confidence curve" for some people who are uncomfortable asking for help and unsure they can explain to contributors why they should be interested in their project.

"The truth is, there's a global community of people that are excited to participate in these entrepreneurial endeavors and to participate in other people's stories," she said.

"Just imagine that a dozen other people have a good idea right now. It's about who is going to execute that, who is going to get it done. And to be honest, sometimes being a little bit vulnerable and putting yourself out there ... that sometimes is the person who will win," she said.

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