Financing a project through online contributions, also known as crowdfunding, was initially met with skepticism and its detractors were repeatedly stunned by every success. Now, however, it has proven to be far more than a fad and everything from major motion pictures, to personal vacations has been successfully crowdfunded. When it comes to the business world, the implications are just as big. Here's how crowdfunding could change the way business gets done.
A shift in financing power
"In the '90s, you would raise $5 million or $10 million in an IPO, but those days are gone, and that has created this black hole for companies," said Mark Cuban, the billionaire owner of the Dallas Mavericks, in a 2013 interview with the Washington Post. The low level of investment disappeared for start-ups, creating a business food chain that lost a good deal of innovation once dominated by small, hungry companies.
Making funding available by simply promoting a project online was unthinkable, even during the period Cuban discussed. Instead of smaller companies finding a way to compete with larger corporations on the basis of their new ideas, start-ups were often swallowed by the bigger fish in the business world. Crowdfunding radically shifted that power dynamic, and now, instead of a start-up failing in its search for angel investors or other sources of capital, the company has the opportunity to find life with a campaign through Kickstarter, Indiegogo or other popular crowdfunding sites.
Empowering entrepreneurs
For entrepreneurs that have been frustrated by a lack of funding in the past, the idea of raising money online may sound too good to be true. In fact, the only requirements for a solid crowdfunded campaign are a quality idea and the ability to generate publicity through the power of social networks and elsewhere online. This shift in funding potential stands to empower entrepreneurs in ways that haven't been possible for decades and, in many cases, doesn't require compensation because the crowdfunding paradigm typically specifies that contributed monies do not have to be paid back.
Additionally, it's not difficult to convince people of the worthiness of a good idea. Filmmaker Zach Braff, who managed to raise over $3 million with a crowdfunded campaign for his movie Wish I Was Here, perfectly illustrates the power of this business model. In a film industry awash in sequels, sci-fi blockbusters and comic book movies, independent filmmakers are having trouble making and distributing small-scale movies. In Braff's case, the public recognized the value of his small movie with heart and contributed in kind. Braff made his film and eventually found distribution, which, if even only for a brief moment, upended Hollywood's control over how modern films are financed.
Entrepreneurs with a product or service poised to challenge an industry's status quo can appeal to the public in the same way and redefine how small businesses are financed. Small contributions from thousands (or millions) of people can change the direction of an industry if the ideas are worthy and the fundraising campaigns on Kickstarter and other sites are successfully managed. The result? . . . Mark Cuban may no longer need to lament the loss of the dynamic wherein a scrappy small company challenges an industry Goliath.
Crowdfunding and monetizing creation
Reeling in contributions to a crowdfunded project may be easier when you allow people to join in the creation process. For example, a business making something unique can invite prominent contributors into the factory to see how the product gets made and meet the people running the show. By monetizing the creation process itself, businesses have a way of garnering support.
Compared to the traditional way of raising capital, which typically is by promising returns to investors, crowdfunding offers much more leeway. This difference gives entrepreneurs thinking way outside the box the opportunity to pursue risky projects. In turn, the amount of innovation for financial backing increases, which in turn puts more established companies on their heels. Consumers who are contributing to these funds benefit when the product makes it to market. By investing, they not only receive the rewards of being "first-in", but as a bonus, they also get to brag to their friends and colleagues about how they astutely recognized and help bankroll a hot new enterprise.
The bottom line: with the rise of crowdfunding, entrepreneurs looking for start-up capital now have more options than ever. Funding your idea may be only a few clicks away.
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