For those running businesses, capital is almost one of the most critical components to ensure that the company keeps going on. Without capital, any hopes of building a business die even before the ideas get turned into products or services which are ready for consumers.
Traditional Ways Of Raising Capital
There are various ways of getting a capital injection, and one of the most common ways is through capital raising from angel investors or friends and family who put their trust in you. In return for their money, companies usually give equity in the company. Fund raising through angel investment has its benefits: it can be done relatively easier as compared to other means of raising capital. Many companies in Singapore has raised capital through angel investments.
The downside? Most angel investors would request for a considerable stake in the company, something which might be too precious for the founders to give up, especially when they are aiming to find other investors in the future.
Rise Of Crowdfunding
In recent years with the proliferation of technology and the availability of internet access, a new way of raising capital has been garnering its popularity among new generation business owners and entrepreneurs: crowdfunding.
For those unfamiliar with crowdfunding, according to Wikipedia, crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the Internet. Small businesses are constantly struggling to stay afloat as competition becomes more intense than ever before, and crowdfunding offers these individuals a shot at success, by showcasing their businesses and projects to the entire world, made possible by the Internet.
Two of the popular platforms for crowdfunding are Kickstarter and Indiegogo, where most business owners choose to set up their business profiles there due to the availability of individuals who are ready to back new interesting businesses and ideas, and get rewards from their contributions.
Since its launch in January 2011, more than 5 million people have funded more than 50,000 creative projects, such as films, music, stage shows, comics, journalism, video games, and food-related projects on Kickstarter. These funders, also called backers, pledge whatever amount of money they want to support the projects and businesses. Without these backers or funders, these 50,000 plus projects would not have come to life.
Even more impressively, on the 3rd of March 2014, Kickstarter announced that it has passed $1 billion in pledges. That’s $1,000,000,000 pledged by 5.7 million people to creative projects featured on the crowdfunding platform. This shows that people around the world are getting more comfortable in supporting creative projects they believe in.
Growth Of Crowdfunding Locally
Interestingly, Singapore, which was allegedly reported as the most expensive city in the world to live in, is among the top 10 countries to be supporting Kickstarter campaigns. Out of the $1 billion pledges on Kickstarter, Singapore contributes $6,710,961 to it.
Perhaps because of this too, StarHub, one of the main telcos in Singapore, has recently launched a crowdfunding site called Crowdtivate, an online social launchpad aimed at helping local and Asia-based entrepreneurs and artists make their innovative ideas come true.
“Crowdfunding is an extremely popular way for the global community to connect with artists and entrepreneurs, and for them to participate in bringing great ideas to life. Many of the most successful companies today have roots in the crowdfunding community,” said Mr Stephen Lee, StarHub’s Head of i3 (Innovation, Investment, Incubation).
Some Cases Of Local Crowdfunded Companies
Several projects and businesses are currently showcased on Crowdtivate in hopes to raise the funds they require to bring their businesses a step further. Among them is Singapore-based iBam Landmark, the world’s first compact electricity-free bamboo speaker for your smartphone. It has raised S$738 so far out of the S$25,000 fund raising target.
While iBam Landmark has not been successfully funded yet, there are definitely other success cases, notably The Buccaneer 3D printer which raised nearly $1.5 million on Kickstarter, a great margin from its original funding goal of $100,000. Another one includes Singapore’s Zelos Watch, which raised nearly $82,000 from its original funding goal of $30,000.
Does Crowdfunding Really Work?
While crowdfunding might be a good way to raise capital for companies, there are certain downfalls for that too.
We spoke to Roger Chang, CEO of the very successful Pirate3D crowdfunding campaign on the matter. Roger agreed that there are certain issues that crowdfunders might not be aware of.
“Since the successful fundraising on Kickstarter, the one thing we did not do right after crowdfunding is growing the team to the task rapidly enough. We should have used our newfound resources to build a great team as quickly as possible. A challenge we faced was finding the right people to fill in the roles,” Roger told Vulcan Post.
“Using crowdfunding as your primary means of funding means you are suddenly thrown into the situation where you have a large number of customers (your crowdfunding backers). They have backed your project and expect a certain level of customer support. Your company may not be prepared for this and would be scrambling to provide feedback and support to your backers,” Roger added.
John Tan, a prominent angel investor in Singapore who is known for angel investing in companies such as restaurant reservation site Chope, popular online groceries site Redmart and a handful of others, also stated that while crowdfunding is a legit way of getting capitals, there might be issue with trust.
“The crowdfunding platform essentially acts as a fund. Investors or backers need to have confidence that 2 years from now, the platform is still around. What happens if the site dies? What recourse is there for the investors and backers?” John told Vulcan Post.
John also added that the downside for entrepreneurs raising capital through crowdfunding is that they need to be fairly transparent with their business model, traction, etc. on these platforms.
“Basically you are opening the kimono to strangers who may be your competitors, or your competitors’ investors,” shared John.
While Singaporeans might be one of the top 10 backers on Kickstarter, John also noted that it would still take some time before Asians are comfortable with the concept.
“Few Asians back a project because they want to see a product come to market. That’s my sense.”
The Best Of Both Worlds – Crowdfunding Vs Angel Investment
While there are certain downsides for crowdfunding, what crowdfunded companies gain is a vast network of backers whom they can leverage on: something which angel-backed companies do not usually get to enjoy. Take Pirate3D again as an example, they already have a ready pool of over 3,500 individuals who are their brand ambassadors and supporters, a network they wouldn’t have had access to without crowdfunding.
Angel investors on the other hand, bring value to the table for companies too as they are usually successful individuals and can be mentors for businesses. Other than tangible and monetary value, angel investors do bring non-monetary values as well.
Crowdfunding is definitely here to stay, and the traditional way of raising funds through angel investments will not be going away anytime soon.
There are various ways for businesses to raise capital, and crowdfunding is slowly gaining its momentum among businesses in Singapore and Southeast Asia, though many still opt to raise capital through angel investments. Some might also argue that crowdfunding is still ahead of its time in Singapore and Southeast Asia.
What do you think? Which one do you prefer to opt for?