Crowd-sourcing is a way to fund a business without using traditional sources? Crowd-sourcing is the act of soliciting funding through large groups of people, usually done through social media groups. It is similar to flash-mob marketing.
Crowd-sourcing is an old funding concept, which has received a new name. Crowd-sourcing is the action of asking people to prepay for products so a business can create the product. Sites have been built to facilitate crowd-sourcing. Kick starter is probably the best known site for crowd-sourcing. In its simplest sense crown-sourcing is, outsourcing over a large group. This allows small contributions in high volumes to push new ideas. It is easier to ask for $5.00, compared to $500,000. Internet and social media has made it easy to obtain $5.00 from 100,000 people.
Is crowd-sourcing to fund a business a viable option? Research shows the crowd-funding industry has raised $2.7billion in 2012, across more than 1 million individual campaigns globally. In 2013 the industry is projected to grow to $5.1 billion. The use of crowd-sourcing will grow in the future.
The original crowd-sourcing model involved the entrepreneur going to the company, and convincing them to pay for a product prior to production. If a new business owner can successfully pull this off they are securing both funding, and a customer. These are two of the largest hurdles a new business will need to get over. Asking for payment before production is not an easy thing to accomplish. It takes a lot of trust from the purchaser to give money without a product to sell. If a business is going to make this happen, they will need a strong business plan to present to the buyer. This is the best form of crowd sourcing if it can be done. The problem is convincing a large crowd to trust a business is hard.
Donation funding is the most common model for crowd-sourcing. Donations to entrepreneurs was how current crowd-sourcing gained popularity. Groups of people with similar interests will fund a business. Seth Godin calls these niche groups tribes. Generally these tribes will only fund companies that are part of their society. Artistic products are most likely to find success in donation funding. Traditional production, and service oriented companies can still generate cash using donation funding. if a business is going to find success in donation funding it will have to connect with an audience. There will need to be something that will move people to donate to the start-up. Tom’s is an example of a company that has been able to bridge the gap.
Investment crowd-funding has become more popular, and will continue to grow. Attracting a large group of investors by offering stake in the company is the definition of investment crowd-funding. Unlike the donation model, financial crowd-funding is entered into by investors in an attempt to profit. This allows large capital investors to reduce risk, and lowers the barrier into capital investment. This will allow the average population to become Venture Capitalist, while increasing the amount of funds available to start-ups.
It is necessary to reflect on the negatives of investment crowd funding. Investment crowd-funding is the act of giving up partial control of a business. The owner must be willing to give up full control when they decide to use investment crowd-funding. A positive to using crowd-funding instead of traditional investment funding, is the spread of small shares will ensure that one person will not have a large control, which will be leveraged against the owner.
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