The web is allowing start-ups to attract funds that circumvent traditional sources
In 2002, New Yorker and musician Perry Chen abandoned his plan to stage a concert at the New Orleans Jazz Festival because he felt the $15,000 investment needed was too risky for him to shoulder alone. But it got him thinking: was there a way of finding if people would commit to support a project – in sufficient numbers to make it viable – before going ahead?
A few years later, he mentioned the idea to Yancey Strickler, who worked for the online retailer eMusic, and with seed finance from family and friends they founded Kickstarter. It is one of a growing number of ‘threshold pledge systems’, also known as crowd funding; project owners describe an idea and set a target for a level of public pledges to be reached within a certain time. If the target is not reached, no money changes hands, allowing anyone to test concepts without risk.
The pledges are not charitable donations, an investment or a loan; project creators retain complete ownership and control over their work. Instead, they offer products and experiences that are unique to each project. Kickstarter, which only operates in the US, takes a 5 per cent commission from ideas that reach their financial target and Amazon, which handles the payments, between 3 and 5 per cent.
Since its launch in April 2009, Kickstarter has raised more than $35m for ventures in music, film, art, technology, design, food and publishing. More than 14,000 people have posted projects and more than 400,000 people have supported them. Eighty new projects are launched every day, and $1 million is pledged every week. They include the TikTok, a watch strap that incorporates an iPod Nano displaying the time. Last November, the owners set a target of $15,000 to put a prototype into production and offered backers the product at a discounted price in return. In less than a month, more than 13,000 people had pledged just under $1m.
Now the concept is being launched in the UK. Last month, Amanda Boyle, who co-founded a successful shop-fitting company based near Dundee, announced plans for Bloom VC. Unlike Kickstarter, it will not be limited to creative ventures and aims to support a wide range of business start-ups, social enterprises and community projects. Its target is to raise £1m in the first year rising to £12.5m by year three and supporting around 4,000 projects. A US launch is planned for next year, not as a rival to Kickstarter but to tap into potential diaspora support for ventures ‘back home’.
“Growth in the UK is being stifled by a cautious, risk-averse lending climate,” said Boyle. “Bloom will enable ordinary people with a good idea to raise the money they need to start their own businesses or social enterprises or support community projects. And they will benefit from support and mentoring as they grow.
“Crowd funding is an evolution in the way businesses raise start-up funds. We have venture capital, seed capital, angel funding and the banks; this is an alternative route that lowers the bar to entry and makes use of our increasing connectedness, online and through social networks.”
The VC in Bloom stands for ‘venture catalyst’ and throughout her career, Boyle has been determined to break down the barriers that are put in the way of entrepreneurs. She began in marketing and communications, with the NHS and Royal Mail among others. After completing a postgraduate MBA, she launched shop-fitters Caledonia Contracts in 1997 which built up a turnover of £4m and has Starbucks among its clients. Caledonia and Boyle won a string of business and entrepreneurial awards along the way.
Boyle has stepped back from Caledonia to develop a series of online projects, including Bloom: “The idea came from talking to lots of start-ups, founders who were struggling to secure the capital to get started or who were starting on less than a shoestring. I started Caledonia on upfront payments from clients and good terms from suppliers. The company has always been cash-rich and we have had support from the banks when we needed it.
“Today, it’s just so hard to get backing and the process can be very wearing even for the most determined entrepreneur. It made me think what it would be like if I was starting out now. People recognise that there’s a problem and although there are alternatives to banks, many of the private-sector solutions are prohibitively expensive while public-sector sources are understandably risk-averse.
“When I began looking at different models, crowd funding leapt out. It’s the ‘support from friends and family’ principle but harnessing the power of the web and social networks. And for today’s generation, that is what they are familiar with. Yes, there is always a risk that someone might raise funds and not fulfil their stated aim but that is the same for any form of backing.
“It comes down to belief and trust – which is what business finance used to be based on – but it will be a very transparent process. That also means that entrepreneurs will either need to protect their intellectual property or be comfortable with publicising a venture that others might try and copy.”
At first glance, crowd-funding may look like just another attempt to raise money online by getting as many people as possible to donate to a cause. But around the world, a growing number of start-ups see the potential that social networks have to raise money in ways that align with how younger generations practice philanthropy. The crowd-funding work for Barack Obama in his 2008 presidential campaign was an inspiration for many.
Kiva, a San Francisco-based non-profit company launched in 2005, has raised $200m in micro-credit loans for developing countries. Grow VC is a global network, based in Hong Kong, which connects entrepreneurs with early-stage investors and currently has more than $16m of funds available. GiveForward, a Chicago-based firm that helps people raise money for medical expenses, has generated nearly $4m since its launch in 2008.
Many of these kind of enterprises are attracting the attention of investors. GiveForward, which charges a 7 per cent commission, recently raised $500,000 in venture capital. EduLender, a Chicago-based comparison-shopping site for student loans that also allows users to raise money for tuition or debt repayment, has raised $1m.
Bloom is a business venture in itself; it has two investors providing the start-up costs and others are waiting in the wings, said Boyle. It has been selected by Scottish Enterprise as a business with growth potential. Like Kickstarter, Bloom will take a 5 per cent commission from projects that reach their financial threshold. The site will go live at the end of next month and be publicised across the UK over the summer. The US launch is planned for Burns Night 2012.
While investors in Bloom itself will receive equity, they will not gain privileged access to the prospectors, as the seekers of finance will be known. Nor will the patrons; those who pledge support. But Boyle believes that the process has the potential to create lasting relationships between those embracing the platform and allow subsequent investment and equity sharing. It will also hopefully increase the number of new and successful businesses forming in Scotland, she said.