Posts Tagged ‘Venture capital’

Crowdfunding: The future of raising capital for SMEs?

July 29, 2009

In yesterday’s FT there was an aritcle, “Financing model with bounce”, looking at Trampoline Systems and their efforts at raising £1m of new capital for business expansion.

They failed to get much interest from venture capitalists and “[s]o Trampoline hit upon another route: “crowdfunding” – raising small stakes from a large group of investors, particularly through online communities and social networks.”

It follows the same idea, but much smaller scale, of SellaBand and Slicethepie. Where bands can raise money to record and publish an album from small investments by fans, in return the investors get an exclusive copy of the cd, other gifts, and in some cases a return from sales.

But would it work for a business? I’m not so sure, firstly the amount of money that needs to be raised is likely to be much higher than the minimum amounts on these two band-based sites. Although for the very smallest start-ups it could be quite useful if raising money from banks or other means is not possible.

Also it requires the person looking for funds to fully engage with their potential investors. Who is going to put their own money into something (whether that is £5 or £10k) if they don’t get a clear idea of what the business is about, don’t like the product, don’t see that the fund-seeker has a clear plan on where to use the money, don’t see a benefit for themselves.

Andy Baio, chief technology officer of Kickstarter, an online platform which raises funds for creative projects through crowdfunding, agrees: “The success of projects hinges on two factors: first, rewards for supporters. It doesn’t need to be financial, it can be a phone call or a credit on a film, or an exclusive update on the project. Second, their ability to promote it to their social network.”

So the key issue for me basically boils down to transparency. How open are you willing to be to secure the funds. To get anything meaningful from complete strangers requires the fund-seeker to be absolutely transparent, candid, easily contactable and involved with reaching out to potential investors. Without absolute transparency the market cannot work as there is asymmetrical information.

I like the idea, and think it works for the small scale of £5-£50 where it can be an impulse investmet, but for the larger scale I don’t think it is possible. I reckon potential investors need to ‘touch and feel’ it firsthand before even considering it; and are super-rich going to bother to take the time to look for these investment opportunities, I doubt it.

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