SA Crowdfunding Blog

Monday, 11 June 2012 21:20

Crowd Sourcing Models for Small Business Funding

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A large number of small to intermediate companies were placed under great stress when the banks stopped or cut back on lending. It was a situation in which short-term loans were often what kept many businesses afloat while they awaited delayed compensation for services or products they supplied. The bank problems made the situation even worse because the clients and customers businesses relied on for their cash flow were strapped financially, too. Work became harder to find, and without small business funding from other sources, some companies were forced to close their doors.

The range of necessary funds can vary from R1,000 to R100,000 or more in small business funding. The amount needed has provided for various and creative ways of crowd source funding. Based on circumstance, there is usually at least one way and often several of procuring small business funding through a crowdfund.

There are four primary crowdfunding models, and there are variations within each.


1. Patronage (Donation) Based Model
Non-profits often request money from constituents without any promise of a return, such as through donations for example. While this has little to do with small business funding, the concept may work if the funds needed are not that large. For instance, crowdfunding was the answer for one family that has an internet site devoted to showing others how to play games.

Rodney Smith makes videos for a site featuring himself and his children playing board games. Realizing the need for money to keep his site active, he attempted to raise R50,000 in business funding. The response was greater than he anticipated as he received R80,760, all free money.

At the time, the website had around 1,600 followers so most of the donations were small. Because of the amazing response, Smith is anticipating locating retail sponsors and attempting to make the site profitable.

Patronage works best in the local community for small business funding. The definition of local community can be anyone who supports your ideologies or interests and has an internet connection.

Patronage is easier to sell when the small business funding does not support large profits for the business owner. While the business doesn't have to be a non-profit, patronage investors typically look to make the world a better place by way of their donations. They do not mind if the small business funding allows the owner to make a comfortable living, as long as the owner is providing something of value to the community.

Projections for 2012 show almost 38% of crowdfunding worldwide coming by way of donations, so obviously there are many people happy to give without getting anything monetarily in return.

2. Reward Based Model
There are many more reward based crowd source funds than the other three models combined. Small business funding through the reward based model means that those putting money into the project or business are going to get something back.

The volume of money from all reward based crowdfunding worldwide is expected to account for almost 10% of funding received in 2012. This indicates that there are many crowdfunds but most are for small amounts, which is to be expected in small business funding.

Rewards are usually perks for giving money to what is considered a worthy cause. A product produced from donated funds might be sold to the donator at a greatly reduced price, or even given away for free based on how much is donated.

3. Lending Based Model
The second largest group anticipated for 2012 is the lending based crowdfund, with around 36% of the worldwide take projected. This is the closest model to the banking industry, and the more traditional way of small business funding. Investors expect to get their money back with interest.

A small company that doesn't make the projected profits under this scenario will be faced with losing a great deal, but if profits are more than anticipated, the payback doesn't change.

4. Equity Based Model
Less than 17% of the total funds raised in 2012 are expected to be equity based. This has always been a realistic way of getting funding because both sides gain if the business does well, and both lose if it doesn't. While it might seem that a business owner willing to give away part of the profits is desperate, remember that this is what occurs anytime a business goes public.

Since businesses must have a hefty bottom line to sell shares, the equity based model provides a way for small business funding in similar fashion for companies that are much smaller.

Negotiations are important from the owner's side to ensure that when the funds are raised, the business will still be viable once the investors get their share of the profits. Equity based campaigns are better handled by those with experience in that form of crowdfunding.

Success Stories for Crowdfunding

Maria Schneider wasn't able to raise the capital to make an album. In 2001, she turned to crowdfunding and raised more than $100,000, which was enough to produce "Concert in the Garden." The jazz album went on to win a Grammy Award in 2004, but more importantly than that, the artist gets a much larger share of the revenues than she would have through a contract with a major producer. Schneider's take is that she doesn't have to sell as many CDs to be profitable, as she would have if the record companies had given her a deal.

Steve Taylor from Nashville, Tennessee was attempting to make "Blue Like Jazz," based on the book by the same name. His original backers decided to pull the plug, but Taylor wouldn't give up on the project. Going to the internet, he promised anyone who would donate at least R100 that they would get a personal call from him.

Many of the fans of the book chipped into the fund and he was able to get about R3, 500,000 for the effort. His goal had been a mere R1,250,000. Good to his word, Taylor called each one, making about 3,500 calls over the span of a year.

A big plus for small business funding through crowdfunding is that there are so many creative ways it can be implemented.

These are just two situations that show how crowdfunding can work as a small business funding solution in South Africa the same as it has in Canada, the U.S., and several other places.

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Ben

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