eBrandz Blog

Capital-raising on niche networks: How it works?

When a recent college graduate was keen to renovate his family’s shop located in Honolulu, the first option this aspiring entrepreneur thought of was a niche social network to muster funds and other resources. Bronson Chang opted to leverage his social network account for the purpose via a ‘crowdfunding’ site, instead of approaching banks to seek a loan.

Fund-raising Web page that works

In September, he used one such platform to create his own fund-raising Web page. It showcased an elaborate business plan. Instead of approaching powerful investors, he invited his family members, friends and interested customers.

The budding business person asked them to check the idea and contribute money. Nineteen of them agreed to invest in his business. They pulled in close to $54,000 in lieu of a 2% cut of the revenue over four years. Sharing his fruitful experience, he quipped: “Raising capital through the closely knit community and through a more democratic way was just a perfect fit for our business.”

Enthused by the initial response, he is now looking to raise $60,000 more, using a public profile on the site. The idea is to let ‘strangers’ to put in as little as $100. They will receive a 2% revenue share – like the private investors for four years – but only till they are repaid. Additional returns, which they receive, will be donated to charities.

Generating money on the Web

An array of crowdfunding sites, such as Kickstarter.com, IndieGoGo.com, ProFounder.com and Peerbackers.com let entrepreneurs like him to generate money collectively toward achieving a set monetary target. This is how it goes:

  1. Ambitious entrepreneurs just need to create a unique profile on any of these crowdfunding websites and list out their monetary goals.
  2. They also need to spell out their plans, explain how they intend to use the funds plus other aspects like an end-date for the respective campaign.
  3. Once the detailed information is posted on the site, interested investors can go through it. They then make a decision whether to pledge fund the entrepreneur’s idea.
  4. These websites typically get a small percentage of the money that a successful entrepreneur receives. All in all, it’s a win-win situation for everyone – investors, entrepreneur as well as he crowdfunding sites!

An offshoot of this interesting trend is a research organization based in Kansas City, Mo. The Ewing Marion Kauffman Foundation is solely dedicated to start-ups. Its vice president (entrepreneurship), Bo Fishback, explains that entrepreneurs tend to prefer the idea of pooling smaller amounts from people, rather than ‘attempting to state the right things to get a rich person to cut a hefty check. He adds: “”We are at the beginning of a major crowdfunding movement, which will disrupt and change the traditional channels for funding.”