crowdfunding – money for nothing?

In the olden days, if you wanted to start up a business or launch a new product, you either had to have lots of your own money or find an investor willing to part with theirs.  For most budding entrepreneurs, it meant having a whip-round amongst friends and family to raise seed capital.  Which, inevitably, meant that those same friends and family then felt that they had acquired the right to tell you exactly where you were going wrong with your idea…

Then came Dragons Den.  Which taught us all that the boy scout motto applies equally to investment pitches and convinced the entire nation that an idea without a patent is utterly worthless.  It also provided a valuable insight into human beings’ capacity for self-deception (remember the guy who wanted £100k for his amazing device for helping drivers drive safely abroad??  It turned out to be a single glove that you wear on your right hand when travelling abroad, to remind you which side of the road you should be on…).

All very enlightening, but, ultimately, it was hard to take the show seriously when one of the dragons clearly thought that a retail high street stationery business was a good idea.

I’m out.

crowdfunding

Now there’s a new way to get investment.  It’s very trendy and inclusive and gives people a warm, fuzzy feeling inside.

It’s called crowdfunding and it involves getting lots of people to invest a small amount of money in your business or product.

When I first heard about it, I was skeptical. I mistakenly thought that each person who invested would get a teensy piece of equity in the business, so you’d have lots of little shareholders.  I assumed that it was a bit like taking your company public, but without people being able to then buy and sell their shares.  I thought that it sounded interesting, but I wondered what would happen if you wanted to sell your company on?… hmmm.

Turns out I was right to be skeptical, but way off the mark in terms of how crowdfunding works…

kickstarter

There are a ton of crowdfunding platforms out there now, but Kickstarter is the biggest for the US and UK markets.  The Mack was looking to use it for one of his business projects and explained how it worked.  We were in a Vietnamese restaurant at the time.  I almost spat my pho out at him.  I definitely remember telling him that he was immoral and that I wouldn’t be any part of it.

Overreaction?  Maybe a tad, but I’ll let you be the judge of that.

So the premise of crowdfunding is that it allows individuals to invest small amounts in businesses or projects that they like the look of and it allows companies to raise money without having to give away any equity.  Typically, individuals can invest upwards of $5 in a project.  In return, they get some sort of reward or recognition.  Whether that’s a name-check on the art film project or an advance copy of the role-play game they’ve invested in.

So you could look at it as a platform which gives rein to the ultimate free market principles.  Power to the people.  A chance for consumers to influence the latest products and support the arts.  A way for small companies to forward-sell innovative products.

Or, like me, you could just look at it as absolutely barmy and ripe for scamming.

money for nothing?

Because it’s not even money for old rope.  It’s basically free money.  It’s the equivalent of the friends and family whip-round of old, but with 10 million mates all chipping in a couple of quid.

It flies in the face of all conventional business wisdom on bootstrapping and angel investment and careful financial husbandry.  You don’t need a business plan.  You don’t even need a company.  You don’t need to show anyone your finances.  Or tell investors how you plan to spend the money they’re investing.

All you need is a project, a snazzy marketing video and enough people who are happy to part with the cost of a latte, and bingo!  Instant success.

Because not only do you raise the money that you need, but you also get massive exposure to your target audience and, if your fundraising exceeds all expectations (the largest amount raised was $10m; over 10,000% of the target), the media will pick up on it too, so further free advertising and even more potential customers.

The most successful projects seem to be those involving funky technology products (smart watches, games consoles), computer games or arty stuff.  That would seem logical – the people who like those things tend to be early adopters anyway, so of course they’d jump at an opportunity to say that they helped make that product a reality.

The Mack and I think it’s only a matter of time before crowdfunding is taken over by organised crime.  Gullible punters willing to part with cash in return for nothing?  It’s the ultimate investor-endorsed Ponzi scheme.

Maybe because of this, Kickstarter has closed its platform to all but “creative” projects.  Don’t be put off.  It seems as though “creative” stretches a long way.  Just take a look at some of the projects that have been funded recently and you’ll get an idea of what flies and if it could work for your project.

And even if Kickstarter is a non-starter, there are many more crowdfunding platforms out there.  Country-specific platforms, sector-specific platforms, even worthy causes platforms.  If you’re looking to attract crowdfunding, then you need to think seriously about the amount of money you need to raise and which platforms get enough of the right eyeballs to make that likely.  As with all of these things, with popularity comes fragmentation and if there are too many platforms, then it becomes harder to attract enough mugs, sorry, investors, to your project.

So my advice…  Get in there now if you’ve got an idea but no cash.  In a troubled economy, it seems there is no shortage of people willing to throw money at new “stuff”.  And they expect almost nothing in return.

Jeez, I bet Madoff wishes he’d thought of this…

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