The traditional funding route for a small business or startup goes something like this:

  1. Raid the piggy bank (again). Result: Nothing, it’s empty.
  2. Beg family and friends. Result: Never-ending feuds and resentments.
  3. Grovel to the local bank manager. Result: Told you don’t have enough ‘collateral’.
  4. Plead with professional investors. Result: Told to come back when you’ve proved the idea.

So, you drop the idea and get back to the hamster wheel! Meanwhile you’ve wasted weeks or months of your life and lost more hair.

Now, as this site argues, the amount of funding most startups or small businesses need to get off the ground has never been less. Still, for some of us there will be times when you need a magic donut making machine for your new restaurant! [Bear with me on this…]

Fortunately, thanks to the internet and social media there’s now a way to side step the financial gatekeepers: Crowdfunding.

Crowdfunding is, according to Wikipedia:

..the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations. Crowdfunding occurs for any variety of purposes, from disaster relief to citizen journalism to artists seeking support from fans, to political campaigns, to funding a startup company or small business

crowd surfer

For a startup or small business there are three main types of crowdfunding ‘platform’:

  • Donation. Lots of people pledge a small cash donation in return for perks, gifts or exclusive access to the project.
  • Lending: Lots of people are invited to make a loan to a worthy cause in the expectation of getting it back: usually without interest.
  • Investment: Lots of people make an investment in the business in exchange for equity, profit or revenue sharing. These sites generally fall under the relevant financial regulators, have been slower to take off … until now.

Crowdfunding is booming! In the last year over 65 crowdfunding platforms have been founded in more than 18 countries. Most of these have been for creative projects but the picture is evolving very fast. Here are some of the most high profile and interesting:

Donation platforms

How they work: This is the most common type of platform. The business wanting funding describes what they want to do in words, pictures and video. How much funding they want. And in how many days they want it. They also set out what ‘perks’ they will offer to each person who pledges a donation. There’s plenty of scope to be creative here.

It’s then time to promote your project via your own networks etc. Being on a high profile platform will clearly help here.

If you reach your funding target by the deadline then happy days! The platform will forward you the donations minus their fees which tend to be around 4%. If you don’t reach your target then most sites will return the donations but more of them now offer the option to pass them on minus a larger fee, typically 8%.

Bloom – ‘Supporting startups, students, social enterprises and community projects‘. A UK-based platform charging 5% of successfully funded projects.

Crowdfunder – A UK-based funding platform for creative projects and inspirational ideas across UK and (the rest of) Europe. Once a funding target is met within a set period of time then the funds pledged are transferred to you less the 5% fee. Part of the UK Crowdcube group.

IndiGoGo‘The World’s leading international funding platform’. Raise money for anything: for-profit business, non-profit cause, or a creative project. They’ve raised millions of dollars for over 50,000 campaigns, across 207 countries. Offer perks or tax deductions to your contributors, get the word out and always retain 100% ownership. Unlike KickStarter there is the option to accept what you have been donated even if it falls short of your target: albeit for a higher fee. The CEO recently said that of the organisations that use the platform, small business is the fastest growing.

KickStarter‘The World’s largest funding platform for creative projects’. Projects make a pitch for a target amount by a deadline date. I’m looking at a project now for a restaurant in Brooklyn New York who need $10,000 by January 6 for a donut making programme including staff training, starter ingredients, donut boxes, donut bags, a mixer and a donut-making machine. Rewards and perks are offered in return for donations starting with one donut for each dollar donated. KickStarter is the most prominent platform at this point.

RocketHub – A launchpad and community for independent artists and entrepreneurs. So-called Fuelers make financial contributions and/or vote on creative projects. The platform takes 4% of fully funded projects and 8% if those that aren’t. Fuelers get ‘cool stuff and experiences’ in exchange for their contributions.

StartSomeGood – Focussed on helping social entrepreneurs raise funds via donation.

Ulule – Like KickStarter and IndiGoGo offers a route to fund unique projects for a target amount over a set time. This site is international but more European in scope. Also offers a way to pre-sell tickets or a subscription for launch a new product, innovative idea or an event.

WeDidThis – A not-for-profit company offering a space for arts organisations to bring their audiences and supporters together to fund their projects. Donations are rewarded with a personalised gift. They aim to have funded over 50 arts projects by the end of 2011.

WeFund – Launched in October 2010 as the first crowdfunding platform for the arts in the UK. It provides a risk-free environment for artists to ask for support and try out their ideas. The project does not rely on a state grant or a single rich investor, rather a series of tiny ‘investments’ that together provide the necessary funding. If a project reaches its funding target, it gets the money; if it doesn’t then it receives nothing and donors are not charged.

Lending platforms

How they work: Much the same as for donation-based platforms but pledge is in the form of a loan. The magic is that the loaned amount can be re-cycled on project after project.

Kiva – A non-profit which lets individuals lend from $25 to local small business owners in developing countries. 100% of the loan is transferred to the local businesses via a network of mircofinance providers. Lenders get regular updates from the business owners via the platform. The repayment rate is 98.93%, and 70% of all lenders use the repayment to make another loan. So far, more than $264 million has been loaned through Kiva helping more than 692,000 entrepreneurs.

Investment platforms

How they work: Create an online pitch (funding required plus % equity offered) and promote it to people you think will want to invest in it. Once you reach your funding target within a set period of time, by lots of people investing a relatively small amount each then you receive the funding: in exchange for equity. If the funding target is not met then the would-be investors get their money back.

CrowdCube‘The world’s first business finance crowdfunding platform for businesses to raise equity finance’. UK-based platform. Minimum target funding is £5,000. Entrepreneurs can also offer ‘rewards’ (incentives) to investors. Questions can be posted for the entrepreneur and replies are also posted alongside the pitch. Regulated by the UK Financial Services Authority.

Symbid – This Dutch site claim to be the first equity-based crowdfunding platform. Entrepreneurs, investors and potential investors can interact with each other on the platform. Entrepreneurs can raise between €20,000 to €2.5 million. The minimum investment is €20 euros.

Late breaking news: Just this week, the US Government overwhelmingly passed legislation to loosen restrictions on crowdfunding investment. The Huffington Post reports just how widespread support is for this move from conservative Republicans to grass roots liberals. This is likely to give a huge boost to the investment-type platforms in the US – and to small businesses and start ups everywhere.

Have you tried to Crowdfunding? If so, how did you got on?

If not, does this sound like a good idea to you?