In recent times, we at McBrain & Company have had lots of people come to us with lots of cool business ideas and in many cases we have even taken the pride of drawing up some pretty kool business plans and/or proposals for them after hearing most talk with such verve and gusto about their ideas to the point one would almost think these ideas were already off the ground and into the operational phases.
And just when it all seems so real, the fantasy popping question comes bring it all to reality “so, why aren’t you in operations yet?”, and then the euphoria dies and suddenly the once illuminated and boisterous face with light bulbs flicking ceaselessly now wears a sad look and then the answer comes, every time to the extent that it has almost become a sounding cymbal, “Bros, no barr nah”.
In one of our earlier newsletters, we dealt with the differences between a Good Business Ideas and Bankable Business Ideas. And for those of you still trying to make up your minds about getting that idea off out of your head and onto paper, of course we are here to help you with that, so that the real hard work of investor sourcing can begin, then It might be best to seek out that earlier sent newsletter or simply send a mail to [email protected] requesting this newsletter and we will gladly forward it to you.
But, today, we would like to talk about an investor sourcing trend that is catching on, mostly abroad, and you should strenuously consider in your business funding efforts. Any demerits you may ask? But of course it has! However, one merit, in our opinion, far outweighs any two/three demerits put together. So, here we go…
Crowdfunding is a way of raising finance by convincing many people to each give you small amounts of money to fund your idea(s). Traditionally, financing a business, project or venture involved asking a few people for large sums of money. Crowdfunding switches this idea around, using the internet to talk to thousands – if not millions – of potential funders. Think of it as a mini IPO without the hurdles of going to SEC for approval. However, like any IPO, you have to up a profile (need one? Then you should be talking to us!) of the project somewhere for people to look it up and study to ascertain project bankability. Then you use social media, alongside traditional networks of friends, family and work acquaintances, to raise your required funding needs.
Below is a brief description of each of the different type of crowdfunding;
Donation / Reward Crowdfunding
People invest simply because they believe in the cause. Rewards can be offered (often called reward crowdfunding), such as acknowledgements on an album cover, tickets to an event, regular news updates, free gifts and so on. Returns are considered intangible. Donors have a social or personal motivation for putting their money in and expect nothing back, except perhaps to feel good about helping the project.
Debt Crowdfunding
Investors receive their money back with interest. Also called Peer-to-Peer (p2p) lending, it
allows for the lending of money while bypassing traditional banks. Returns are financial, but
investors also have the benefit of having contributed to the success of an idea they believe in. In the case of microfinance, where very small sums of money are leant to the very poor, most often in developing countries, no interest is paid on the loan and the lender is rewarded by doing social good.
Equity Crowdfunding
People invest in an opportunity in exchange for equity. Money is exchanged for a shares, or a small stake in the business, project or venture. As with other types of shares, apart from
community shares, if it is successful the value goes up. If not, the value goes down.
Upsides
Crowdfunding provides another strategy for startups or early stage companies ready to take it to the next level – such as rolling out a product or service. Before, a business owner was subject to the caprices of individual angel investors or bank loan officers. Now it is possible to pitch a business plan to the masses.A successful crowdfunding round not only provides your business with needed cash, but creates a base of customers who feel as though they have a stake in the business’ success.
Downside
If you don’t have an engaging story to tell, then your crowdfunding bid could be dead before even hitting the ground.
And that could be a lot of wasted time that could have been spent doing other things to grow the business.
What could be worse is you realize you underestimated how much money you needed. Another business risk is getting sued if you made certain promises concerning the product or investment perks in return for donations, and then failed to deliver.
There is also an argument to be made that angel investors and even bank officers provide more than just money. They provide entrepreneurs with needed advice. Business owners miss out on such mentorship when they ignore traditional investors and turn to the crowd.
To be Cond; Do Stay Do tuned and never forget…
Nothing good comes easy, so never stop trying. Good luck, and be patient
with yourself and humble with your successes…
Brain Essien is writing from Lagos
