How Crowdfunding Is Changing the Small Business Landscape
by Wil Schroter, Fundable, CEO
You may have heard stories about how crowdfunding is profoundly affecting our artistic landscape, allowing projects that might have fallen to the wayside come to life and changing the game for creative types and other entrepreneurs. But this source of funding isn’t just filmmakers, artists and authors who have tapped into the generosity of their fans and the general public.
Small businesses, too, can use crowdfunding to raise capital and turn their ideas into more successful endeavors. For example, Aleph Objects, manufacturer of the LulzBot 3D printer, raised nearly $300,000 by crowd-sourcing investments.
With crowdfunding, entrepreneurs rally financial support for their early-stage start-ups from regular people, not venture capital firms or banks. Platforms like Fundable allow entrepreneurs to publicly share their offer to solicit funds via relatively small investments from a large number of individuals. Today, breweries, yoga studios, nonprofit organizations and others exist because of funds contributed by everyday donors.
The Evolution of Crowdfunding
Historically, fundraising from friends and family has been the most consistent way new businesses raise start-up capital. In fact, friends and families of entrepreneurs invest an average of $60 billion per year, whereas angel investors and venture capital firms invest a combined average of $40 billion per year according to the Angel Capital Association.
Small business crowdfunding allows entrepreneurs to expand their networks beyond friends and families. The first platforms were launched to help creative and community projects gather support, but over time, entrepreneurs began to use these platforms. These Web sites provide a means for entrepreneurs to quickly spread the word throughout their existing social networks, with the potential for it to be shared with people they’ve never met who may be interested in supporting the project or business. In other words, crowdfunding for small businesses takes individuals’ social networks and activates them for a capital raise.
Rewarding Your Donors
Rewards-based fundraising is the most common model, allowing “backers” to contribute funding in exchange for a reward (usually a new product or gadget, or exclusive access to something before the rest of the general public).
Rewards-based crowdfunding is a fantastic resource for both creatives and entrepreneurs. This funding is often the capital injection they need to build a prototype, hire key staff or do a first production run. When entrepreneurs need larger amounts of money, or their businesses are in a later growth stage, they will also often turn to equity crowdfunding and begin looking for investors.
Crowdfunding Doesn’t Discriminate Based on Location
One of the most exciting outcomes of small business crowdfunding is that businesses no longer need to be based in large cities or innovation hubs like Silicon Valley to access investors. By taking advantage of the virality of social networks, entrepreneurs from coast to coast can solicit funding from backers or investors anywhere in the country.
The successful Aleph Objects is based in Loveland, CO, population: 70,000. Though their facilities are more than 1,700 miles from New York City and more than 1,200 miles from Silicon Valley, the company exceeded its initial fundraising goal nearly threefold, proving that geography is irrelevant.
The Unexpected Side Benefits
Beyond the obvious benefits of quickly raising capital, this type of funding offers other significant, positive outcomes that entrepreneurs may overlook when considering the pros and cons.
Entrepreneurs who successfully meet their fundraising goal love their backers. These individuals are more than one-time supporters of a short-term campaign — they’re potential new customers and already loyal enthusiasts. By conducting a crowdfunding campaign, you also get to collect invaluable feedback from an interested group.
Additionally, rallying a large number of customers through a rewards raise is an excellent piece of traction that an entrepreneur can leverage down the road to convince investors that their company has true growth potential. Increasingly, entrepreneurs follow up their rewards fundraise with an equity raise in order to keep the momentum going and fuel further growth.
The Future of Crowdfunding for Small Businesses
Since 2009, the crowdfunding industry has grown 1,000%, and projections indicate it will grow 92% in 2014. What does this mean for the U.S. economy? More than 270,000 new jobs and an injection of more than $65 billion into the economy. This incredible tidal wave and capital is truly changing the small business landscape forever, and giving many small businesses the injection of cash and customers needed to succeed.