VGR Investiments

Crowd Funding - Overview

What is Crowd funding?

Crowd funding is an alternate approach to get investments for a start-up.

It's not actually a new idea as it has been developed over the last decade, mainly in the film and Music industries. Unlike traditional models which rely on large contributions from one or two institutions, crowd funding is based on raising small sums from many people. Instead of raising 300,000€ from three angels (100,000€ each), you collect 10,000€ from 30 private investors.

Crowd funding isn't going to replace venture capital, private equity, debt finance or stock markets.

In many ways it's an evolution of "friends and family" and "angel" models, just operating with greater transparency and on a larger scale. It may even turn out to be an essential and complementary part of the financing tools needed to cultivate and grow new businesses.

One of the newest approaches to funding nonprofits and entrepreneurial ventures is raising capital by appealing to a large group of potential donors rather than a few wealthy individuals or organizations. So suppose that you'd like to explore the possibility of crowd funding; what's the first step?

The first thing you'll need to do is to look into different crowd funding platforms and create an account once you make your decision. Depending what kind of venture you're looking for funding for, you may want to choose a particular platform over another, since some are better suited for different projects and nonprofits and each has their own set of pros and cons.

Some crowd funding platforms are open only to individuals and organizations with projects in the arts: performers, artists, musicians, writers, curators, filmmakers and the like. Some platforms permit fundraising for charities, business expenses, travel expenses, medical expenses and other needs, but others do not.

How does it work?

Crowd funding uses the incredible reach of the social media and the Internet to make it easy for entrepreneurs to connect with potential investors. Add to that the power of microfinance, and you have a capital raising technique with a huge potential.

In simple words, you post a pitch online, use tools like social media, blogs, and word of mouth of publicity to spread the word and catch the attention of potential investors (including those registered on the crowd funding platform).

Early shares offer a powerful platform where entrepreneurs can pitch their business ideas, spread the word about their pitch and connect with interested investors registered on the site.

You may have your own large network of potential donors, but of course, not everyone will choose to donate towards your project. Typically, somewhere between 70% and 80% of donations come from friends and family, with the remainder coming from friends of friends or from complete strangers.

The most compelling argument in favor of crowd funding is also the most simple: the more people who are aware of your project, the better your chances of receiving donations. That's exactly why you should use social networking platforms to spread the word about your projects and their progress.

One especially effective tactic which is also good practice is to thank donors publicly on social networking sites. This helps encourage others to donate as well as reminding everyone in your social network that your project is ongoing and still seeking donors. By taking the time to update the status of your project and spreading the word to your network, you'll bring in more donations.

For example, look at the following case study. Here, we'll look at how a startup mustard company managed to raise more than $4,000 using crowd funding.

This small business began seeking funding in order to allow the company to upgrade their production facilities and begin producing enough of their mustard to fill orders from local shops. One selling point which worked to the company's advantage was their dedication to using high quality ingredients, locally sourced when possible.

The company needed $4,000 to make the necessary capital investments and ended up receiving nearly $4,300.