There is currently a lot of interest and hype around Crowdfunding as a new way to fund innovations. The success and exponential growth of platforms like KickstarterCrowdcube and Indiegogo means that there is a variety of choice.

We thought we’d share our thoughts and experiences for those trying to understand the pros and cons of when and how to use crowdfunding as a way to secure investment for new ideas and projects.

What is Crowdfunding?

Crowdfunding is the collective effort of people who pool their money (and effort) to support a specific goal. It has an “all or nothing” approach within a specific time limit and there are often other benefits in return for investors such as goods, events, kudos, experiences and even equity .

Whilst crowdfunding is growing fast and powered by the web, the concept is not new. For instance the Statue of Liberty was crowdfunded by the citizens of the USA and France and many church spires have been crowdfunded over the years.

Top 3 Benefits of Crowdfunding

There are many reasons why crowdfunding might be the right approach for you and your project. Four of the main benefits of crowdfunding in our experience are as follows:

  1. The best crowdfunding projects are those that both improve their proposition through feedback from the community  – both positive and negative – and find collaborators with complementary skills.
  2. The ability to build potential customers before you’ve gone any further and, in the case of product innovation, invested lots of time in production costs.
  3. The ability to fundraise very quickly compared with traditional funding routes. In fact many institutional investors now see crowdfunding seed capital as a helpful market validation of your idea before they invest.

Top 4 Challenges of Crowdfunding

As with all things there are also many reasons why crowdfunding might not be the right approach for you and your project. Four of the main challenges of crowdfunding in our experience are as follows:

  1. Crowdfunding is increasingly competitive and being able to ‘stand out from the crowd’ is increasingly challenging
  2. Crowdfunding can become somewhat of a beauty contest, where the best videos and pitches succeed but not necessarily the best ideas (but isn’t that true with other business areas as well?)
  3. Even though crowdfunding is a more democratic form of fundraising, the biggest and arguably best crowdfunding platforms still have gatekeepers who can stop your project being listed
  4. There is a risk that innovators will overpromise and even abuse the good will of the community, though we are not aware of specific cases as yet.

Who is Crowdfunding for?

Lots of small companies are extending their reach and successfully raising investment through crowdfunding. However, some larger organisations such at LEGO (with their excellent LEGO Ideas programme), Zopa (with their peer2peer finance models), Unbound (with their crowdfunded book publishing model) and CRUK (with their innovative My Projects approach to fundraising) are implementing some of the elements of crowdfunding to back new and interesting ideas.

Conclusion

In summary, whilst Crowdfunding is not necessarily new, and almost certainly a little hyped at the present, it is also in many ways the future. Whilst the term may lapse with time, the concept of more people sharing more resources in new ways is increasingly becoming the business and investment model of the future.

By Roland Harwood, Co-Founder and Networks Partner of 100%Open, who specialise in open innovation crowdsourcing with the likes of LEGO, Unilever and Oxfam.