Imagine if all the pocket change in an entire city could be directed to fund or grow a small business. One handful of change might not make a difference, but a thousand of those small contributions can create a solid source for funding for an aspiring company. Funding through many people, or crowdfunding, is a way in which many private citizens pool their support and funds for a specific project. The Internet has helped make crowdfunding a valuable source of capital outside of VCs and bank loans. Websites like Kickstarter allow groups of people to fund ideas that they find worthy – making capital for small businesses available through a democratic process of private equity rather than a decision from a small group of funders.
For example, Rafael Atijas, a New York University student from Uruguay successfully used Kickstarter to fund development of the Loog Guitar, a small-scale three-string guitar for children. Atijas set a funding goal of $15,000 but was able to raise $65,618 from 441 backers. With crowdfunding, there are usually incentives or acknowledgments for backers. In the case of the Loog Guitar, backers received premiums that included a guitar stand and a guitar lesson via Skype with the guitar’s creator.
The Loog Guitar was obviously a crowdfunding success. However, crowdfunding does have its weaknesses. With so many ideas presented on Kickstarter and other sites, popularity or promotion can lead to one idea getting funded, while a better one doesn’t. Development can also get bogged down with so many investors able to weigh in on advancing an idea.
While the Internet certainly makes crowdfunding easier, crowdfunding also can be used to help local businesses or hometown projects, similar to a barn raising. One example is the Comfort Eatery in Hastings-on-the-Hudson, NY. When the recession hit, restaurant owner John Haiko was unable to borrow enough money to finish remodeling his restaurant. To save this restaurant, Haiko saught the help of his patrons and offered $600 of credit towards meals for every $500 they contributed. Haiko was able to raise $25,000 in six months.
Whether web-based or locally organized, crowdfunding can be useful to entrepreneurs who are looking for some extra capital to save or kick start their business idea.