Rewards-based crowdfunding is the most popular route for seed-stage funding

Crowdfunding
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Barry James
Founder and CEO
FundingHubs.com, TheCrowdfundingCentre.com
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Raising the money you need to get your idea, business or product off the ground has always been difficult. The shift to a knowledge and ideas-based economy in which startups often have little or no equipment to lend against, and the impact of the recession have meant it’s more difficult than ever.

Or, at least, it has been. A new report shows rewards crowdfunding has become the primary route entrepreneurs use to raise seed funding, and discusses its impact on the UK and world economy.

Rewards crowdfunding: the new seed funding

Let's forget the labels for a moment, and look at a new form of funding that has become firmly established in the UK and beyond purely on its merits.

Rewards crowdfunding is helping launch more businesses than any other form of seed funding, including startup loans, and equity from Angels and VCs, who struggle with the seeds-stage funding because such trifling (to them) amounts are actually needed.

Angels and VCs are well paid, their time is expensive and they could be being concentrating on later stage investments with bigger numbers and, therefore, potential returns attached. For these reasons, seed-stage funding is not economic for VCs. It's not very economic even for angels – the same logic usually applies.

So, why bother? If I had £1 for every time someone had been told "it's easier to raise £1m than £10,000” then I'd certainly have the latter and most probably the former.

Even the doyen of the VC-seed world Seedcamp turns away 99% of applicants, limited as they are by the 'places' available.

The message to budding entrepreneurs and businesses is that this is the new seed funding, the brakes are off, the doors are open. 

Compare and contrast this with the new seed funding - rewards based crowdfunding - where a practically limitless number of ideas can be funded with little risk to anyone. And ideas are judged by the ultimate arbiters; the markets who will sustain these businesses in the long term. This is based on their true merits in the market, rather than how much money an investor can make and how fast.

This is, of course, the 'Kickstarter model' or rewards crowdfunding, to give it its proper name, so let's look at the latest data that’s just been published.

The state of the nation

The State of the Crowdfunding Nation report is the first in a new ongoing quarterly series initially covering more than 300,000 rewards crowdfunds conducted through 2014 and 2015 from all the major platforms and published by TheCrowdfundingCentre.com, which I founded.

A total of 18,000 crowdfunding projects were started in the UK in 2015, of which 23% reached their goal, raising an average of £11,000. This helped UK innovators raise around £50m (more than £585m was raised worldwide). 

A total of 18,000 crowdfunding projects were started in the UK in 2015, of which 23% reached their goal.

Technology, design and film projects were where the most money was raised, at £11.6m, £6.4m and £5.1m respectively, although successful projects raised funds in 40 different categories.

Globally, reward crowdfunding is estimated at over $1bn, with more than $820m on the top two platforms (Kickstarter at $590m and Indiegogo at $233m).

Kathleen Minogue, founder of LA-based consultancy Crowdfund Better, pointed out: “This report blows the lid off the received wisdom and the kind of siloed thinking we've seen, putting it beyond doubt that crowdfunding is providing seed and growth funding across a wide reach of industries and geographies – and shows no signs of relenting.”

The report expects reward-based crowdfunding to grow at around 25% globally through 2015. 

Could it hit the buffers?

Unlike traditional funding reward-based crowdfunding does not actually require a funding pot. The money making up the seed capital is revenue coming from disposable income. Therefore, it is much more elastic and limited only by the appetite in the mainstream economy.

A message to government, entrepreneurs and businesses

The message to government is clear: this is an important and permanent change to the innovation and, therefore, the mainstream economy, driven as it is increasingly by innovation and entrepreneurship. 
 
The message to budding entrepreneurs and businesses is that this is the new seed funding, the brakes are off, the doors are open. With traditional funding, I would estimate you have at best a 1% chance of being successful. With reward-based crowdfunding, your destiny is largely in your own hands and if you prepare well you have a better than 25% chance of raising the seed money you need direct from your market, simultaneously acquiring customers and learning a lot in the process.

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07th Apr 2016 11:49

Kickstarter has definitely made it easier to get funding regardless of what area you are in. From the people and for the people, I think this is the best way to sum it up.

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