I’ve always hated the old adage that the only way to fund your start-up or company is by utilising the three F’s: Friends, Family and Fools.
The insinuation being, not only are those with any business nous unlikely to believe in you, but that those who did believe in you, did so for emotional or foolish reasons.
Most of us know what it’s like to struggle when a start-up is in its beginning phase, so it’s heartening to hear the same narratives from the successful. A good example would be when Elon Musk would camp out on a mate’s sofa, although it just so happens that the sofa he surfed on was in the living room of Google co-founder, Larry Page!
Not all entrepreneurs are fortunate to have such a connected network, and that’s why we have seen a trend of more entrepreneurs moving towards crowdfunding as a capital strategy.
Crowdfunding has truly democratised the funding process as an alternative for those who are unlikely to get a loan or investment through traditional avenues. The issue, though, is the idea that ‘easy money' is the answer to the funding needs of a start-up.
One of the biggest criticisms start-ups receive surrounds the lack of commercial viability or revenue focus, regardless of how great the idea is. If an entrepreneur knows they can quickly raise $30,000 via crowdfunding as seed capital, it changes the game entirely. However, it’s still crucial that the same scrutiny a first tier investor would place on an entrepreneur is applied internally.
Great technologists, creatives and visionaries still need to identify how to make their business sustainable, while still maintaining quick cash injections. It is important to do this without the cash-burning reporting and transparency frameworks often associated with the practice. The worst outcome is to create a successful crowdfunding campaign (which in itself is an art form) only to burn through the money, disappointing yourself and the people who threw cash your way.
Another roadblock that these entrepreneurs may face is excessive orders and backers that result in crushing and out-of-control production costs. The perfect example of this is the $52,000 raised by environmentally friendly sandal entrepreneurs who simply could not deliver the products. Or the company that promised a 3D printer and raised almost $1.5million, only to realise hardly any backers actually wanted to receive the final product.
Both campaigns found that the funds alone cannot fulfil the orders, and while more capital raising efforts may have occurred, the businesses eventually declined. This is not to say that businesses that raise funds via debt-funding or traditional investors are not likely to fail, as we know from depressing statistics.
Therefore I pose a question; if you receive a cash injection without repayment plans or investors eager to see a return, does the individual running the business become less focused on driving revenue and commercialising the business?
Crowdfunding can absolutely be a helpful strategy to raise funds and awareness; however, it is not the simple path many entrepreneurs believe it is. The effort behind a successful crowdfunding campaign is a strategy in itself, but the entitled suggestion ‘I have a great idea, give me money’ is dangerous and short-sighted.
The thought process should actually be “I have a great idea, let’s explore the various ways of funding this to transform it into a sustainable company”. And for that to happen, it takes more than a 30-day campaign and blasting reminders to your friends on Facebook; it takes a long-term approach, strategic navigation and a whole lot of guts.