Get social when it comes to funding

Entrepreneurs are always on the lookout for alternative sources of finance for their businesses, and it’s no surprise that one of the most talked about avenues has emerged from social media…

Crowdfunding harnesses “the power of the crowd” to fund new ventures. Crowdinvest and the about-to-be-launched RainFin are two companies operating in this space in South Africa. Crowdcube and Fundingcircle, companies both launched in 2010, are making waves in the UK market. Fundingcircle is responsible for having facilitated the provision of loans to the value of almost £24-million since its launch. Other names to look out for include Startup Addict, Rockethub, CoFolio and Start Some Good (for social entrepreneurs).

The concept

While rules and regulations vary from one crowdfunding site to another, the basic concept is the same. Entrepreneurs looking for funding create an account, and complete details regarding their business description, fundraising goals and some of the advantages that their concept offers investors. It’s essentially an opportunity to pitch online, so it’s important to show passion and convey what a great idea you have; answering all the who, what, when, why and how questions and giving a convicting reason as to why consumers need your product/service.

Pitching entrepreneurs often offer perks to entice people at various levels. These could be financial (gains to be made), personal (public exposure for the investor) and perhaps scarcity (you will only take five investors on board). Then, in true social media style, it’s about getting the word out to all your friends and followers and targeting people who you think would potentially get involved. Some investors will donate amounts without expecting returns, while others may want some sort of stock in the company.

As UK investor Neal Gandhi puts it: “If you’re putting R1000 into a company, you hardly expect much say in it. You’re just playing the numbers really, with your low-risk investments spread across a broad portfolio and a number of start-ups benefitting from this shared risk.”

The crowdfunding site earns its profit by taking a percentage of whatever amount is raised – 4% seems to be an approximate average for campaigns that meet their goals, while failed campaigns are penalised with a 9% fee.

In addition to the benefit of raising finance, some crowdfunders claim that another advantage is the ability to glean wisdom from the masses, by asking investors to actively contribute their ideas and feedback, and offer their expertise.

Any cons for all the pros?

An initial concern regarding the future of crowdfunding related to significant regulatory barriers that made it difficult to offer this type of investing opportunity on an open platform, particularly in the US. Fortunately, the US House of Representatives passed a bill recently that will liberate “the crowd”. Some critics are sceptical about the protection that such initiatives offer investors (people don’t want to be endlessly hounded once their details are publicised) and then there’s the question of whether this financing model is scalable at all.

Crowdfunding takes effort, which won’t always pay off. If you haven’t met your goal within an allotted time frame, any pledges that you have received will be returned; and you will still have to pay a fee to the site.

As an entrepreneur, you’re always going to have to weigh up risk and reward. Perhaps this is a good time to put your business out there and see what comes back? If you’re confident that your idea has got what it takes, chances are the crowd will agree.