The Dream

Has crowdfunding changed the way impact businesses are set up?

Social impact businesses struggle to attract traditional sources of funding. Their businesses models are deemed too complex and risky by banks and misunderstood by many mainstream investors meaning, inevitably, compromises have to be made if they are to secure the capital to get the businesses off the ground, which can be tough for any small business. Take the US for example where according to the Small Business Administration, about 600,000 new businesses are started every year. Of that number just 300 startups were funded by Venture Capitalists. That means 99.95% of entrepreneurs will struggle if at all to get funded. That number includes mainstream firms too, so imagine just how difficult it is starting up your social impact business. Now, however, there is a new source of funding that is changing the social impact business landscape forever and that is crowdfunding.

Crowdfunding is a tool that allows anyone — be it social entrepreneurs, artists, students and many more — to attract capital from a diverse range of people to invest in their business idea. There are three main types of crowdfunding: Equity, Reward and donation-based crowdfunding, which allows the social impact business to be flexible about what it can offer to investors in return for their investment.

Because of its flexibility both in terms of how people invest and how rewards are determined crowdfunding has changed the way we determine success. It means those businesses with the best access to capital are no longer the ones that have the best chance of survival; instead, with crowdfunding it is the best ideas that flourish. That means entrepreneurs can be more dynamic and innovative in their approach in the knowledge that they can still attract the capital they need to start their business. This has huge potential for social impact businesses because it means that they no longer have to make compromises to attract investment – if the idea is good the capital will come to them.

There are many crowdfunding platforms available to social entrepreneurs from the likes of the well-known Kickstarter and Indiegogo to lesser known specialist sites such as Prodigy Finance. The Social Stock Exchange too is in the process of setting up its own crowdfunding platform, which importantly will offer a secondary market allowing retail investors to trade their investments.

Recent research from TABB Group shows that the crowdfunding market could reach $17 billion globally by 2015, with more than 1,000 funding organizations formed to raise money. $17 billion – is a veritable mountain of cash potentially open to businesses – impact and mainstream alike – that otherwise would not have been there. Crowdfunding is democratising finance and helps promote the triple bottom line: people, profits, and the planet – meaning it is about the stakeholders not just the shareholders, which works perfectly for social impact businesses.