Taamara de Silva highlights the pros of crowdfunding for interested parties

What does it take to convert a brilliant idea into a profitable business? Funding! Instinct takes many an adventurous entrepreneur to the closest bank in the hope of converting an idea into action and establishing a profitable business; but unfortunately for banks, this trend is becoming obsolete.

Nowadays, entrepreneurs don’t beg on their knees in search of loans so banks must explore more efficient ways to service the growing startup culture.

More often than not, entrepreneurs don’t have the required collateral, consistent cash flows or financial stability that banks require when disbursing credit. What they have is a unique idea, a burning passion and an acute focus to succeed. And therein lies an opportunity for investors and private funders.

Crowdfunding brings together – mainly through social media and online platforms – small sums of capital from many individuals to finance a new idea or venture. In essence, it has opened the door to those who are unable to participate in the traditional bank funding mechanism.

Today’s gig economy has transformed the opaque and oligarchical market for initial fundraising into a more open and liberal process. Crowdfunding platforms are fluid and constantly innovating to introduce creative ways to fund new projects. This ecosystem is vital to keep pace with our ever-changing world while the traditional system isn’t equipped to invest in new ideas that don’t have a guarantee of success.

Life and careers are now more dynamic – essentially temporary, contractual or freelance – compared to the full-time employment that promised job security and long-term stability. This has resulted in more self-employment and self-managed teams, which collaborate on specific projects while demanding flexibility and increased freedom from traditional job roles. And this has given rise to many startups resorting to crowdfunding as a viable funding solution.

There are several benefits. Crowdfunding through established platforms provides much needed access to accredited investors and the general public. It’s an efficient way to attract investors especially in the initial phase of a business.

Secondly, with minimal commitment, a creator gets the opportunity to validate and refine a product or service offering in line with the saying ‘the wisdom of all is greater than the wisdom of a few.’

Efficiency is another benefit. The ability to centralise and streamline funding through a single streamlined profile will eliminate the need to pursue potential investors individually. Also, there won’t be requirements to meet investor requests based on individual preferences – as is the case for many startups, as their bargaining power is limited.

In terms of public relations, crowdfunding will enable startups to gain much needed visibility for their products or services through social media and other channels, and steer traffic to their company web-sites and other resources.

While crowdfunding was initially used to raise funds for charitable causes through donations, it is gaining value as a mechanism to raise equity to fund businesses – especially startups. Equity crowdfunders will fuel ideas by providing working capital in exchange for a small stake in the business much like in the case of angel investors.

Participating in early stage startups offers the potential for explosive growth and substantial returns that mature companies cannot guarantee. However, despite the apparent risks, maximising potential alongside multipliers offers more promise for such investors.

It’s about taking calculated risks and increasing the probability of success. With any investment, it is important to ensure a sufficient return for the risks taken. But it’s not easy to make predictions.

Yet, remembering a few points can help in making informed decisions.

Avoid complexity. For instance, a proven product is more likely to deliver better results than a CAD drawing or prototype. The more complex the project, the higher the possibility of failure.

Before investing, it’s vital to conduct a background check and ascertain the creators’ credibility as your money will be at their disposal. Are they capable of delivering expectations and what is their track record?

Moreover, be vigilant. Pledging money is only the beginning. It’s crucial to follow up and keep tabs on progress along with the rest of the investors.

While loan based crowdfunding requires licensing and registration from the Central Bank of Sri Lanka, equity crowdfunding is generally pursued in accordance with the provisions in the Companies Act. In fact, inequitable access to finance and innovations around ‘P2P lending’ have already been identified in the government’s Vision 2025.

Although the model is globally proven, Sri Lanka is gradually embracing crowdfunding as part of the startup ecosystem, thereby heralding a brave new world of investing – it is the premise of a win-win partnership.