Posted on May 20, 2013 By iPledg With 0 comments

Crowd Funding – the Alternatives Don’t Stack Up

“Money never starts an idea. It is always the idea that starts the money”. But when the money hasn’t started rolling in or when it is required more quickly to get the idea off the ground, there are a number of external sources from where capital can be obtained. The traditional way was to go to the bank, and win over the bank manager. Over the years, more creative methods came into being. With the greatest requirement for funding being small tranches, crowd funding is leading the way as the fastest growing form of e-commerce on the planet.

At the top of the funding ladder is the stock exchange. Reserved primarily for “the big boys”, an average listing will cost you around $500,000, not to mention the surrender of equity you have to face in raising capital this way. One needs to consider the handover of control to the investment bankers, lawyers and accountants from the time you even consider putting together a prospectus. Furthermore, start-up companies must demonstrate the potential to develop into profitable enterprises that will deliver significant annual increases in sales and earnings.

Step down a couple of rungs on the funding ladder, and we have the traditional custodians of cash – the banks. Capital raising by way of obtaining a loan from banks has been successfully accomplished for many years. However it is the need to meet the criteria for acceptable risk so that you can obtain the loan, as well as the additional (hidden) charges, the cost of interest, and the cashflow impacts from the need to make regular repayments that have seen traditional bank lending being overlooked in preference for crowd funding.

The counter-side to loans is to give away equity in your initiative, idea, or business. Venture Capital from institutional funds is available, but post-GFC times have seen an evaporation of much of this funding and the bar considerably raised by the risk-adverse funders. Should you be successful in securing funds from a venture capital institution, there is the need to surrender some of the control and the profit, and to ensure that you serve more masters than just satisfying your own goals and desires.

Whilst less stringent or demanding than seeking the venture capital solution, angel investors do also offer an alternative source of funding. Angel investors can also offer the additional benefit of their personal involvement to the evolution and commercialisation of your concept, idea, product or business. However, there remains the need to give away equity and some control, meaning a need to give away some of what you have worked so hard for, not to mention the requirement to ultimately pay back the capital at some time.

Grants offer yet another form of funding to various forms of initiative. Assessment criteria are usually quite high, and there are stringent performance criteria and reporting requirements to be completed along the way, which can consume productive time. There is also the suitability of the grants on offer. Case in point was when, in early 2012, there were 8 schemes available on one particular government website (that of a government department set up to help small business), 5 of which had closed, and of the remainder, the smallest amount on offer was $10mil. Given the fact that 99% of businesses are small business, and most requirements are for small packages of funding, this case highlighted the disconnect between available grant funding and the needs of the market to whom such funding is aimed.

Until the advent of crowd funding, there were (and still remain) many options available at the top of the funding ladder. However, crowd funding now not only offers a sustainable and relevant solution to fill this gap, but a fresh, new and highly workable answer to the funding requirements for creative, commercial, charitable and community initiatives all around the world – a solution that does not involve loans that need to be repaid or the surrender of equity in the idea, product, or service. Is it any wonder that the providers of the traditional forms of funding are more than a little concerned at the global rise and rise of Crowd Funding?

Leave a comment