Most new commercial ventures are based around the conceptual – a great idea that has been fleshed out to varying degrees, whether it be merely an articulation of the concept, working diagrams, or (in a minimal amount of cases) proof of concept trials. But when entrepreneurs, inventors and project creators go to the market to seek investment, they do so seeking support for blue sky concepts. Pledge model Crowd Funding offers project creators the ability to demonstrate social proof and real interest from the crowd, and this becomes quite a powerful platform on which to attract further investment.
Rather than going to the market cold, offering little more than a great idea, those that have implemented a successful crowd funding campaign have the social proof to then go to the market with an almost proven concept. Consider the inventors of the Tik Tok Watch Kits who were initially told by potential distributors that their product would not really be attractive to the market, only to have over 13,000 backers when they subsequently ran their crowd funding campaign.
Amassing backers is a solid attestation as to the potential market interest in the product. Rather than collecting well-intended expressions of interest, project backers provide far more than good intent. Project backers back their interest with their wallets, providing potential future investors an indication of the true and sincere market interest of the product, business or concept.
With governments experiencing ever-tightening budgets, crowd funding may provide a great way for them to qualify businesses and start-ups for the grant funding being applied for. Currently, grant applicants must convince the government body of the proposed merits of the project for which they require funding. Most of the application is based on forward projections – market potential, export prospects, etc, but little is given to the market proof of the project to date. If governments were to make crowd funding a part of the application process, they could potentially qualify applicants as to the proven market interest, as well as obtain feedback from those who do provide funding to the campaign. In addition, pressure could be removed from the government grant pool, as crowd funding could provide part of the funding sought by grant applicants, meaning that each one would need less grant funding, allowing for the available grant funding to go further and help more applicants.
Crowd funding campaigns, once successfully executed, could provide more comfort to potential angel funding, or funding by both sophisticated and general mum-and-dad investors. Again, it is all about proof, about the confidence of the investor not having to be the first follower, but for them to see that others have already backed the concept financially, to see interest in the product, business or concept. A successfully run crowd funding campaign gives the potential investor the comfort that there are others willing to back the venture, that there is a market for the endeavour, and that investing is less of a gamble and more of a sensible decision to back a concept with momentum and a proven following.
As the new year dawns, and crowd funding becomes the fastest growing trend for 2013 in the finance world, sites like iPledg may well become the initial test portal for not only raising seed funding, but for the proof required to obtain considerably more funding from the broader investment community.