Ask anyone who follows innovation what topics are hot and it is likely most of them will say “crowdfunding.” By now, sites like Kickstarter and IndieGoGo have created thousands of loyal followers. In recent months even the real estate industry has entered the scene.
What is Crowdfunding?
Crowdfunding involves the use of the internet and social media to raise equity or debt capital, typically from a large number of investors, each of whom chooses to invest a relatively small amount. Typically crowdfunding can take two forms: private crowdfunding, through which private entities seek to raise capital from individuals who qualify as “accredited investors” under regulations of the Securities and Exchange Commission (SEC); or public crowdfunding, through which public offerings registered with the SEC are marketed primarily to retail investors.
Crowdfunding has potential to change the way a lot of industries work. In real estate crowdfunding, providers and consumers of equity or debt capital can join to finance specific investments or investment entities. (See our recent post on crowdfunding in real estate.)
Its impact will undoubtedly be felt across the retail industry. In a selective pool of crowdfunding sites culled by Entrepreneur magazine contributor Sally Outlaw, four of the top ten crowdfunding sites have some type of retail industry application.
Crowdfunding’s Ripple Effects Through Retail
Why does crowdfunding have such potential to impact retail?
First, crowdfunding otherwise democratized the process for entrepreneurs who may not be able to make their way into the Shark Tank. Rather than dipping solely into personal savings or a securing a line of credit, anyone looking to lease larger space, hire more staff, purchase equipment or create more inventory can now raise capital from more than just friends and family. It also allows midsized brands (of which there are many in retail) the opportunity to grow more quickly. Vehicles like CircleUp help mid-market companies too small for private equity and too large for commercial banks the opportunity to flourish.
Next, since crowdfunding opens the doors to anyone as a potential investor, it allows participants to target money to businesses in which they truly believe. The success of the brand will not just generate a profit but offer the investor a deeper level of engagement with the brand. Crowdfunding turns that pool of “interested parties” or “loyal customers” into valuable stakeholders who can really become brand ambassadors.
Where are We Headed?
While gaining in popularity, as with any new platform, there’s more validation to be done. An article in The New York Times recently described some ethical issues raised by asking already-paying customers for more money. There is a potential big reward, but some risk too, in using crowdfunding to boost brand equity. Entrepreneurs and business owners will need to assess the readiness of their potential investor base and their own willingness to assume that risk.
Regardless of industry, crowdfunding is here to stay. Whether you’re an investor looking for a worthy cause or a passionate purveyor of unique goods, growing a business could be as close as a click of the mouse or a swipe of the tablet.