Crowdfunding As An Alternative Way To Source Funding For Entrepreneurs

Author: Thebe Matlhaku

We live in a world where the ability to start a business requires a lot of liquidity. With stringent banks and increasing costs, entrepreneurs need an alternative to source cash to invest in their inventions. Historically, prospective businesses would either be forced to queue at a bank or source funding from an already established individual or business. However, we now live in the modern era and with pooling of risk, individuals and businesses alike can source funding through the phenomena of crowdfunding.

Crowdfunding is self-explanatory; funds are sourced from a crowd. The concept is not new as it can be traced back to the emergence of Stokvel’s and Burial Societies. The idea is that several people contribute a pre-determined amount of money with the intention to pay for a future event. 

Crowdfunding is an alternative method of acquiring funds as prospective investors with a small portion of their net income to invest in an idea that may or may not realise a return. Lavery (2016) confirmed that Tesla was able to raise $260 million US Dollars in less than 7 days from pre-sales on down payments alone.

There are several reasons why Entrepreneurs should consider crowdfunding to raise capital. Lavery (2016) states that an initial investment in an entrepreneurs’ idea is validation that the “crowd” believes in the non-existent but imminent dream. Secondly, crowdfunding helps to pull risk and prevents the entrepreneur from investing all their assets in the idea. Furthermore, not only does it help to build well sought out connections but also allows the future entrepreneur to tell their story. Ever heard the quote, “you don’t buy the product you buy the individual behind the product.”

Businesses built through crowdfunded methods are not without success. Schroter (2014) highlights that some of the successful business that were funded through the pulling of funds. The Pebble E- smart watch managed to raise over $10 million US Dollars in 5 weeks. This product was able to rival the more established smartwatch brands such as Polar, Garmin and Suunto. One of the success stories of this modern era is the wireless smart in-ear headphones. These headphones have single-handedly brought a new meaning to convenience in relation to fitness workouts.

It is important to note that Crowdfunded projects are also susceptible to certain risks. Typical risks are contractual, financial and credit risks. A lot of Small to Medium Micro Enterprises have a life span of less than five years. The businesses that survive are those that can innovate and reinvent themselves with ever changing market conditions. We live in a world of risk and like Erica Jong said “if you don’t risk anything you risk even more”.

Though, the above-mentioned risks should not be a deterrent to source capital through crowdfunding. When hard working individuals believe in your business model and work ethic, the entrepreneur has both a professional and moral obligation to ensure that work is done in a satisfactory manner.  Banks will always require collateral and venture capitalists will always require equity.

Crowdfunding only requires belief…

References

Lavery, C. (2016) Here’s 7 reasons why you should crowdfund your idea. Found on: https://www.littlemight.com/7-reasons-you-should-crowdfund-your-idea/

Schroter, W. (2014) Top 10 Business Crowdfunding Campaigns of all Time. Found on: https://www.forbes.com/sites/wilschroter/2014/04/16/top-10-business-crowdfunding-campaigns-of-all-time/#55bf33443e9f

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