This article provides information on a service available that may be of interest to our readers and is not a recommendation or financial advice regarding making investments.
Crowd Funding is a way of generating funds for a project by getting a number of people to invest money instead of, or in addition to, seeking investment from larger venture capital firms or angel investors. There are examples of crowd funding going back to the building of the Statue of Liberty, but it’s become more popular with the growth of the internet and social media as a way to manage and promote businesses — especially with the continued rise of the ‘tech start up’, not only in Silicon Valley, but throughout the World.
Benefits & Risks of Crowd Funding for Founders
One of the benefits of crowd funding for the founder of a start up is that the investors don’t get a percentage of your business and don’t get any control or input into the way the company is run, like a large investor would require, unless you want to include it as part of the return. Investing in this way can also attract early media coverage, thereby increasing the profile of your project and you also have feedback early on from your target market and can take on board this information for future development, marketing and funding requests.
But there are risks for founders. Your project is out there earlier and you may be concerned about protecting your intellectual property (IP) or getting negative PR before you have the funding to do anything about it. In many cases you need to raise 100% of the goal amount or you receive none of the funds. For some projects, the pros outweigh the cons, especially if your project does not fit into the usual profile that is desirable to larger investors.
Benefits & Risks of Crowd Funding for Investors
As an investor in a crowd funded project, your level of investment is usually smaller and therefore less of a risk, but obviously that all depends on your own situation. Information about the project is open and available to potential investors so easy to access before making a decision. You don’t need to take on any responsibility in the project and often you get some sort of early access to the products or service that is offered.
There is are risks in investing in this way as there are risks in any investment. As you are only one of many investors the return will not be as high and there is always a chance the project may bring a poor return or even fail. You don’t get a percentage of the business going forward, unless the founder chooses to include this as part of your return (and most often they choose this way of funding because they do not wish to). As there is no regulation or protection in most jurisdictions, you need to take care to check that the project is authentic and that you are sure that there is no chance of fraud.
Crowdfunding Platforms
Crowdfunding Platforms facilitate the process, usually through a website. Platforms can have a variety of structures and may cater to certain types of projects. Kickstarter, one of the most well known platforms, only works with ‘creative’ projects: “Since our launch in 2009, more than 4.1 million people have pledged over $620 million, funding more than 41,000 creative projects”. Razoo focuses on fundraising for ’causes’ rather than projects. Appbackr connects app developers with backers, while also assisting with the technical aspects of getting an app to market.
Irish & UK Crowdfunding Platforms
A number of platforms started up in the UK in 2010, around the time of the change in government there. Funding Circle has funded over £104 million in loans and more than 1,000 businesses have borrowed, Crowdfunder.co.uk has raised over £500,000 and Crowd Cube has raised over £8 million. See more at: ‘Crowdfunding Takes Hold in the U.K.’ from the Wall Street Journal
With the lack of credit coming out of Irish banks for SMEs and new projects, it’s not surprising that crowd funding is taking off in Ireland. Linked Finance is a new Irish platform that started up in March 2013. Since then they’ve funded €260K to 10 businesses via thousands of lenders. Linked Finance’s Marc Rafferty says, “€95 billion in savings accounts in Ireland earning little or no interest, that would be better off in SMEs.” They have done a video that explains the process:
Borrower feedback has been good for the sole Irish platform. Des Ruddy, Managing Director of Launch Diagnostics says, “We were delighted with the experience we had borrowing through Linked Finance. Their use of social media and constant communication with the lenders helped push us over and beyond our target, and now we have the funds to grow and develop our business.”
Crowd funding isn’t completely new in Ireland. Seedups is a platform, founded in November 2010, with a focus on tech start-ups and has offices in the UK, New York City and Silicon Valley. FundIt is a crowdfunding platform in Ireland that started in 2011, but rather than investing in a project, you are backing the project without a financial return, though you would get a ‘gift’ of some sort: a copy of the product produced, invitation to an event, etc.
More resources on crowd funding in Ireland:
- @Crowdfund_irl is a Twitter account providing news on crowdfunding in Ireland
- Crowdfunding a new kind of industrial revolution, Silicon Republic
- Investors can take a punt on start-ups with crowd-funding, Irish Examiner
Many people are finding crowd funding as a way to enter the investment market or just dabble, but there are also a number of more serious investors involved. If you are thinking of getting involved be sure to check into the platform and involved parties carefully and note that some platforms may only include projects and investors based in their own jurisdiction or specific jurisdictions.
Have you used crowd funding before, either to get funding or to invest?
Do you think crowd funding is a good way for a start up to fund projects?
Let us know in the comments below.
