BY BUHLE NDWENI | May 12, 2014
Does your business need a capital injection? Are the banks unwilling to take a risk on your idea? You could try a crowdfunding campaign. Here’s how to go about it
Obtaining a capital injection, especially for a startup, is difficult. But there are ways to get around this and convince potential investors to take you seriously. One is called crowdfunding.
Crowdfunding campaigns help entrepreneurs working for both non-profit and/or for-profit enterprises access funding from willing investors.
Investment analyst at Knife Capital, Vasilios Kottas Bonel, says crowd funding solves funding issues faced by startup companies.
“In particular, this problem is faced by idea-stage companies that would rarely qualify for investment from angel investors or venture capitalists due to an unproven concept and lack of traction,” says Bonel, adding that there are three crowdfunding models currently used around the world.
These are donations (for non-profit organisations), and lending, and investment (for profit-making businesses).
CROWDFUNDING FOR NON-PROFIT ORGANISATIONS
The non-profit crowdfunding model is a very straightforward concept that does not differentiate itself much from charitable donations to a cause, says Bonel.
“No ownership is exchanged for funds and theoretically, the crowd funders simply hope to see the cause that they’re funding succeed.”
There are a various ways for-profit organisations can be funded. “Startups or entrepreneurs with an idea can source funding for the development of their product only, or for their business as a whole,” says Bonel.
“Crowdfunders who help fund the development of products generally do so because they want to see this product hit the market. This is generally motivated by the fact that there is no other comparable product in the market, from the funders’ perspective.”
He says they believe this to be a viable first step for any startup.
“The issue with for-profit crowdfunding arises when funds are exchanged for equity in the transaction. The startup can raise money from sometimes thousands of involved parties who now have to be allocated an equity portion (ownership in the company).”
Crowdfunders who help fund the development of products generally do so because they want to see this product hit the market… [because] there is no other comparable product in the market, from the funders’ perspective
Bonel says startups need more than a cash injection to succeed. A credible investor would need to leverage networks, add strategic value and work closely with the company to maximise its growth. This is something that cannot be done by a crowdfunding model that has a lot of equity partners, since they would not be incentivised enough.
PRACTICAL TIPS ON STARTING A CROWDFUNDING CAMPAIGN:
1. Speak to those who’ve walked the road before. Bonel advises entrepreneurs to consult others who have succeeded at raising capital through crowdfunding. read more on