Getting started

Crowdfunding for small business: An introduction

- October 23, 2012 3 MIN READ

Everyone from creatives to entrepreneurs and charities are using crowdfunding to kick-start their ventures, so it’s no wonder micro business owners want a piece of the action. Here are fundamentals of crowdfunding for small business.

If you’ve got a great idea and a sense of ambition, there are now more opportunities than ever to find financial support through the internet. Crowdfunding websites are booming in popularity for those wanting to get their idea off the ground – whether it’s creating a product, recording an album, making a movie or starting a business. 

A quality campaign on a crowdfunding website can also work wonders for building your business’s online profile and for attracting attention from investors. 

While convincing people to donate or invest money in your business idea via crowdfunding is not easy, small business success stories verify – it can be done. Before we get to the how, let’s look at what crowdfunding involves. 

What is crowdfunding? 

Crowdfunding is basically the raising of monies from a crowd (local communities, friends, family, fans etc) in the form of pledges. 

Crowdsourcing is not the same as crowdfunding, so it’s important they’re not confused. 

Crowdsourcing is a combination of the words “crowd” and “outsourcing”. With crowdsourcing, a job is outsourced to a crowd of workers in order to get it done faster (many hands make light work); or alternatively, a brief is submitted to a crowd whose responses can be evaluated and the best worker/supplier chosen to do the job. Websites that facilitate crowdsourcing include 99designs and Freelancer Contests.  

With crowdfunding, however, rather than you giving money to a crowd to complete tasks, they are giving you money to complete your own task or project. With crowdfunding the sky is the limit – but only if you can convince a crowd to fund your idea! 

Who can use crowdfunding? 

Until reasonably recently, crowdfunding has mostly been used by artists, charities and start-ups to raise money for projects, such as:

  • Charitable projects
  • Research
  • Inventions
  • Educational programs
  • Films and documentaries
  • Music albums and concerts
  • Games
  • Book publication 

In many respects it is a democratised version of patronage (sometimes called “micropatronage”) where instead of one wealthy person supporting a creative artist in return for personalised works or performances, many people can now contribute small amounts and be rewarded for their participation. Rewards might include public recognition of contribution, a copy of what’s being made, exclusive information, pre-release, a limited edition or a signed or custom version. 

Want more articles like this? Check out the business startup section.

It is this principle of rewards and perks that motivates most people to contribute to campaigns. The remainder of contributors consist of friends, family or fans who simply want show their support by way of a contribution. 

Kickstarter is perhaps the best-known crowdfunding platform for creative projects with over 29,000 projects funded since April 2009. Two other significant sites are Pozible and Crowdfunder

But creatives aren’t the only ones who can benefit from crowdfunding. 

Crowdfunding for small business 

There are three general categories of crowdfunding that give a bit more potential for smaller businesses that are not purely “creative” in nature. 

  1. Equity-based crowdfunding is when you ask a crowd to donate to your business in exchange for equity. The crowds to pursue in equity-based crowdfunding are shareholders, stockholders and investors interested in your area of business. Some popular equity-based crowdfunding platforms are: CrowdcubeSymbid and Growvc
  2. Donation-based crowdfunding is when you ask a crowd to donate to your project in exchange for rewards of value, such as a gift card to spend at the business, product placement in a movie, merchandise or the finished product itself. Crowds to look for here are avid fans, philathropists, gadget lovers, and experimental investors. Rockethub and IndieGoGo are huge sites for all sorts of projects including commercial ventures. Importantly, a pledge is not an investment, so traditional legislation regarding funding and investments does not apply. 
  3. Debt-based crowdfunding (sometimes called social or peer lending) is when you ask a crowd to donate to your business or project in exchange for financial return and/or interest at a future date. The crowds that will be involved with debt-based crowdfunding are mostly investors and entrepreneurs. Website Prosper and Lending Club offer opportunities for this kind of funding. 

Regulation of crowdfunding

As recently as August 2012, ASIC commented that crowdfunding, as a discrete activity, is not prohibited in Australia, nor is it generally regulated by ASIC. “However,” said ASIC Commissioner Greg Tanzer in a statement, “depending on the particular crowdfunding arrangement, ASIC’s view is that some types of crowdfunding could involve offering or advertising a financial product, providing a financial service or fundraising through securities requiring a complying disclosure document. These activities are regulated by ASIC under the Corporations Act and ASIC Act and may impose legal obligations on operators of crowdfunding sites and on people using those sites to raise funds.” Watch this space! 

If this has whet your appetite to know more about crowdfunding, stay tuned for the next instalment, which will cover what you as a micro business owner can source funding for, and how to go about doing it.  

Are you intrigued by crowdfunding, or know anyone who’s doing it? Let us know in the comments!