Over the last decade, the progression of technology has equipped entrepreneurs with inexpensive tools to convert their ideas into successful businesses. Companies have been able to build large, overnight tribes of customers and product champions using very little capital. Although an early-stage company should prioritise bootstrapping as its means of financial sustenance, for some, this is not always a viable option. Converting some ideas into businesses can be capital-intensive, particularly those dependent on expensive production and R&D.
Traditionally, entrepreneurs in need of capital would opt for one of two routes, 1) approach a bank for a loan and pay an interest, sometimes in exchange for collateral and/or 2) approach high-net-worth individuals for cash in exchange for equity in their company. For many entrepreneurs, securing investment has become a common metric of success, meaning entrepreneurs are willing to take on high burn rates, intense pressure and hockey-stick style growth trajectories in exchange for cash. Unfortunately, this ends up killing many companies before they even get a chance to shine.
A crucial step many companies are skipping is the market validation stage. When you’re low on capital, you become more efficient with resources and utilise all tools at your disposal to make the business succeed. When you’re still figuring out the vision of the company, building the prototype and testing the market need, the last thing you need is external pressure and exertion of control. During the early stages of a company, utilising resources efficiently is vital for survival and raising money from investors or applying for grants can become a huge distraction.
This is why entrepreneurs are exploring alternative finance models. In 2015 the crowdfunding market grew to £3.2 billion (NESTA). 42million was facilitated through rewards-based crowdfunding platforms in 2015, with a 62% year-on-year growth rate (£21m in 2014, £26m in 2014) according to the 2015 UK Alternative Finance Industry Report. Crowdfunding has proven to be immensely beneficial for startups as it brings together a group of passionate supporters to fund a project that they believe in bringing to life. It is the practice of funding a project or business by raising money from a large number of people who contribute relatively small amounts and it’s a great way of bringing an idea to life and to prove the market need for a business before investing in resources.
Aspiring entrepreneurs, creative artists, multinationals corporations, individuals and businesses can leverage crowdfunding to acquire early customers, pre-sell products, crowdsource creative ideas, forge partnerships, secure press and build communities. If the power of crowdfunding is harnessed correctly, it can give individuals in any part of the world an inexpensive tool to start a business, access capital, secure customers and market validation. This means that we can equip anyone to become financially independent and use this capital to solve local problems and contribute to the economy.
Global poverty is probably the biggest moral crisis of our time yet. Fortunately, we’re now seeing the rise of a new and evolved generation; one which no longer has the patience to wait for others to solve its problems. Thanks to millennials, consumer trends are shifting towards conscious spending – issues such as equal pay, environmentally conscious manufacturing processes, human trafficking are all at the forefront of consumers’ minds. Social enterprises are shifting the way problems are solved and crowdfunding is enabling these companies to tackle big problems.
It won’t be long before crowdfunding replaces traditional forms of financing and starting a business.