The internet has changed the way that business operates in so many ways in the relatively short time that it has been available to most people. Customers and suppliers are closer than could have been imagined 20 years ago, even if they are physically continents apart.
But as well as the way that commerce is conducted has undergone a revolution, so too has the way that it finds the sources of investment that allows entrepreneurs with plans for a new small business to start-up, or an established company to fund investment for new projects.
The phenomenon of crowd-funding is older than most people imagine. The Statue of Liberty was an early example of individuals donating a small amount of money each to make the thing a reality.
However, in the modern age, the advent of, of all things, a rock band looking to find funding for a tour at the beginning of the 21st Century, and later an album saw Marillion pioneer the format by getting their fans to pre-order records and tickets.
Now, the technique, sometimes known as the Marillion-model, has been studied at such places as Oxford University, and in its wake many websites offering crowd-funding or peer-to-peer lending have sprung up, where individuals can look at a business model and decide to put some money towards it in the expectation of getting a relatively reduced risk return on in due course.
However, there is the potential for this method to be abused, in the advent of entrepreneurs looking to crowd-fund either a new small business or project which may have a shaky premise,that may not stand the rigours of a more formal examination if they followed the traditional path through the banks or business angels.
A slick looking, impressively assembled proposal could easily mask a flimsy foundation for a business plan, which may get past the well-meaning but inexperienced investor with money in Kickstarter or RocketHub.
And, since the potential loss is relatively small on an individual project, the temptation could be to look to crowd-fund an idea just to see what would happen.
This approach could start to give the crowd-funding sector a bad name and dissuade potential investors from it. Those who enjoy watching ‘Dragons Den’ and fancy having a go at investing in a start-up business in a limited way, could easily go and find alternatives if they keep coming up against schemes which even the proposer doesn’t really have a lot of faith in, but just wants to use other people’s money to give it a go, without the commitment and oversight that a traditional lender might expect to see.
At its best, crowd-funding is an excellent way for entrepreneurs to find the finance to make the idea come to life, establish a small business and make it work and hopefully be able to make a living and pay back the investment with a decent return.
At worst, it is a licence for the charlatan to extract easy cash which may, in the long term, jeopardise the whole industry.
