Crowdfunding Basics: The concept that "the many are smarter than the few" has been around for as long as we have. Taking into account the collective opinion of a group of individuals cancels out idiosyncratic noise of individual views and points to "the truth". Sure, this approach to business investment itself is not new, but a few things have happened just recently to make crowdfunding if widely adopted, one of the smartest, most useful tools for the global economy that we could wish for.
What is new is that in a time where banks are failing business, this method of raising investment capital is revolutionising the way businesses are created and run, although there are some serious risks, and the biggest one is distraction. Here are the highlights.
1: It's Quick.
A crowd fund can be built, campaign launched, funded and banked within 3 to 4 weeks, which really is astonishingly quick, and any campaign lasts no longer than 60 days. Even today and within an (UK) SEIS tax-efficient framework, the fastest comparable form of investing through VC or private Angel funds would take 3 months. EIS takes more like 6 to 12 months. If the crowd like what they see, a business might take less than 10 days online before they are completely funded. Typically, if a business is funded to 30% within 10 days of the campaign start, it is 80% likely to succeed, and when it rises to 35%, it is 95% likely to succeed.
But there's a warning: from my own experiences raising funds, it will quickly turn into a full time job and puts a business at serious risk. Sure - banks no longer lend - so crowd is a fabulous new option to get it done quickly and efficiently. But you must be incredibly well prepared, produce a rock solid business plan and financials, put a great 2 to 3 minute video pitch together, and you're away.
2. Fast failure.
Its easy to see crowd campaigns which are succeeding, and those that just don't work. After a few short days, the crowd has spoken, the businesses trend online, and the campaign is on its way. The great efficiency of this process means companies that should exist, receive the funds they need, at a fair valuation. Those that are ill conceived don't survive the barrage of online Q&A, and simply cease to exist. This is especially great - those lucky people get to fail quickly, rather than harbour ill-conceived projects, and move on to ventures that will work. Excellent for everyone concerned.
Its true crowdfunding is very public and not for the feint hearted, but the principles are largely the same as they have always been. If the concept is a great idea, the team is solid and led by an accomplished founder, the product is built at least in its first iteration and works well, and money is being made, then the basis of a successful business is right there. SEEDRS has created an environment that super-enhances the capability to reach investors and allows businesses to find funds fast. WRIGGLE, an app for last-moment trade has so far secured 59 investors in less than a week, unsurprising if you consider the speed of growth, uniqueness of the business model and strength of team.
3. A break from the old routine
There are many brilliant VCs out there from those offering seed capital to tens of millions. I have observed just recently that many VCs realise that they are now competing with the crowd, with individuals who want to touch and feel their own investments in a secure environment rather than pay into a blind fund and trust others to take the right decisions. The very best funds are changing the way they offer new business a range of bundled services as well as just money, such as virtual FD services, Investment Directors, hands on NED roles, and on-call support in legal services. My feeling just now is that crowdfunding will increasingly force VCs previously able to operate on their terms to fall into line. It appears to me seems to me that business Angels not working alongside crowdfunding concepts will become hardest hit from all this, which is great for startup business. No longer can one individual Angel conjure up a valuation that "feels right", and not have that assumption "held up to the light", or more explicitly - turned to the crowd, where the true value is revealed.
The wisdom of the crowd has always been there. Technology means the crowd itself, through platforms like SEEDRS, is now big enough (tens of thousands of investors) to genuinely make the right decisions on who should succeed and who should not. Crowdfunding principles, coupled with secure payments and smartphone optimised management, has finally brought investment to every member of the public who wishes to participate. Businesses are only just scratching the surface of what is possible - this new world order really presents unprecedented opportunities for growth, employment and wealth creation.
Robert Clarke is founder of Firebox100 a fund for startups with traction. For details on how to apply check out his site HERE
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