Raising funds for a new business idea can be tough at the best of times. But did you know that there is a crowd of potential investors out there in cyberspace, ready to fund the next Google?
“Crowdfunding” or “crowd financing” allows people or organisations to raise money for a business venture or project by promoting it online. Similar to eBay, individual investors can log in and pick a project to invest in directly, potentially gaining access to investment opportunities that were previously restricted to wealthy individuals or businesses.
While the concept has gained support from US authorities, Australian startups are restricted by the so-called “20/12/2” rule. This means that entrepreneurs can raise a maximum of $2 million from no more than 20 “retail” investors over a 12-month period without the need to satisfy the investment disclosure regime.
Another restriction is the “no general solicitation” rule for promoting investments. However, donations, pledges and in specie returns of goods and services are generally considered legally acceptable.
The basic concept of crowdfunding for startups has attracted strong interest due to its relative simplicity, with crowdfunding platform Kickstarter reportedly raising nearly $100 million last year in the United States.
For as little as $100, investors can choose to support a charity, acquire the option for future goods or services, or loan the money on the basis of an agreed repayment schedule. Alternatively, the $100 may buy a small stake in a business, with the prospect of future rewards should it prove profitable.
For promoters, it is as simple as developing the business idea, determining the amount required and posting it on a crowdfunding platform. A time limit is generally set, with the project only proceeding if the target amount is raised.
In Australia, crowdfunding platforms include iPledg and Pozible, with the latter having reportedly raised more than $2.5 million for over 1300 creative projects since its launch in 2010. In early August 2012, projects listed on its website for funding included the Queensland Literary Awards, proposed feature film The Margin of Things and John Gorilla café in Melbourne.
However, getting investor attention requires more than just posting the idea on a website.
Build a fan base
Pozible advises all wannabe crowdfunders to “build a fan base” for their creative project as early as possible, whether through email or social networking sites such as Facebook and Twitter.
Check the most popular projects on the site – what makes them stand out from the others?
“Setting up your page doesn’t mean you don’t have to do the legwork of going round and getting people interested in your project and inspired enough to invest in it,” says Ben Mortley on Pozible.
Be conservative when setting a fundraising target. The bigger the fan base, the bigger the potential amount that can be raised, but not all your fans will be able to spare the necessary cash.
Promoters should also consider why someone would invest in the business idea. What is the potential reward? Could it be improved?
Promoting the idea
Pozible advises users to create a three to five-minute video telling the story of the project or idea in a compelling and fun way.
Other ideas include approaching the media to try and attract some publicity concerning your world-beating idea. During the crowdfunding campaign, regular promotion is essential, although without “spamming” people.
Exploring the opportunities for non-profits, Wesa Chau suggests in Pro Bono Australia a number of prerequisites for crowdfunding, including having an innovative project idea, developing good marketing materials, using a website or blog, social media, an effective mailing list and having a group of people to champion the idea.
In Australia, success stories have included online publication New Matilda, which reportedly raised $175,000 on Pozible to relaunch itself.
This article represents the views of the author only and not those of American Express.
Anthony is a communication consultant at BWH Communication and a freelance writer with 15 years' experience in the stockbroking and media industries of Australia and Asia. He is a regular writer on business and other issues for publications in Australia and Japan. He consults on communication strategy to businesses ranging from private enterprises to professional service firms and publicly listed companies, with a particular interest in entrepreneurship in all its forms.