Raising capital today is changing. Several years ago when credit was more readily available, capital appeared to be accessible to many. With the economic downturn, the business financing climate drastically changed. Small business owners and entrepreneurs began to explore non-traditional capital funding resources to start new businesses and grow existing businesses. Alternative funding options began to increase through asset based financing, crowdfunding, and more.
Crowdfunding is an alternative funding vehicle for entrepreneurs and small businesses, to raise capital from a large group of people, some of whom may be peers. Crowdfunding is used to support projects, inventions, launch a business, finance a proof of concept, pre-sell new products, finance production costs for a feature film, etc. Test marketing for new products or product lines, working capital for raw materials or inventory are other possibilities for crowdfunding. The landscape continues to evolve daily with increased innovation amongst entrepreneurs and business owners who are unwilling to accept “no” when confronted with a financial barrier. Platforms typically charge a fee of 5% or more of the funds raised. Billions of dollars are raised on an annual basis through crowdfunding.
Contrary to common beliefs, crowdfunding was introduced long before the 1990s. Crowdfunding platforms such as Kiva are still in existence today. Other platforms like Round 1 Funding, Street Shares, Fundable, have been around since the 2000s. An example of this peer-to-peer funding goes back as far as 1885. Do you know why the Statute of Liberty stands today? When the American Committee for the Statue of Liberty ran out of money for the Statue’s pedestal in 1884, Newspaper Publisher Joseph Pulitzer came to the rescue with a creative solution. He wrote an article and published it in his newspaper that resulted in about 125,000 New York residents donating $1 or less to raise the money needed. This generated $100,000 to pay for the Statute of Liberty pedestal. In thanks for the donations, each contributor’s name appeared in the newspaper. These elements are critical to modern day crowdfunding.