Remember when you were a child and needed to raise money for something special (e.g., to build a treehouse or buy a bike or toboggan)? In my case, I would ask every family member to donate to my cause. In a way, this was a form of crowdfunding: soliciting funds from a group of individuals to help build or buy something special.
Fast-forward a decade or so (in my case a depressing 30 years), add technology advances and business methodologies and we now have entrepreneurs raising funds not only to build something special, but to change the world in the process.
What is crowdfunding?
According to Wikipedia, crowdfunding (sometimes called crowd financing, equity crowdfunding or hyper funding) “describes the collective effort of individuals who network and pool their money, usually via the Internet, to support efforts initiated by other people or organizations.” In MaRS’ case, entrepreneurs could use crowdfunding to fund their startups.
The “poster child” among startups using crowdfunding today is watchmaker Pebble, which used a reward-based model to raise US$10.27 million from 68,929 people, making it the most crowdfunded startup. According to Crowdsourcing.org, crowdfunding platforms raised $1.5 billion globally in 2011.
Pros and cons of crowdfunding
There are many pros and cons associated with crowdfunding for Ontario entrepreneurs. MaRS client Myke Predko, co-founder and CEO of Mimetics Digital Education, says: “Crowdfunding provides an excellent way for entrepreneurs/startups to get their message out to prospective customers in a low-cost, low-risk manner.”
But it might not be for everyone. Here is a short list of the pros and cons:
There are various crowdfunding models:
Examples of leading crowdfunding platforms
A crowdfunding platform’s primary revenue model is a percentage-based commission on funds paid out to entrepreneurs. A few also generate income by offering white label solutions and cash management by maintaining responsibility for netting and settlements (Source: Crowdsourcing.org).