Crowd Funding, A new way of raising capital for your business -Pocket Finance by Omilola Oshikoya

It is widely recognised that new firms face difficulties in attracting external finance in their initial stages, be it through equity capital, bank loans or bootstrapping. Numerous entrepreneurial projects stay unfunded, partly because of lack of adequate value that can be guaranteed to financial investors. To avoid these problems, founders of creative projects have recently employed a new source of finance, which involves tapping the crowd, instead of professional investors.

The concept of crowdfunding is embedded in the wider concept of crowdsourcing, which refers to the act of tapping into the collective intelligence of the public to complete business-related tasks that a company would otherwise either perform itself or outsource to a third-party provider. With crowdfunding, the objective is to gather money from the public for investment purposes, typically using the internet and social media. As opposed to raising funds from a small group of sophisticated investors, crowdfunding assists firms to obtain relatively small amounts of money from large audiences (the "crowd").

One of the triggers that helped crowdfunding grow tremendously is the 2008 financial crisis, which made it difficult for entrepreneurs to access funds from banks and other traditional sources of lending. This has forced business people and other non-governmental organisations to shift from established traditional structures to other functional methods. Crowdfunding is therefore just one of the ways that businesses have used to raise the funds they need. Since an increasing number of ventures remain funded, they are willing to try the new pool of investors and funders that also seek ready markets for their financial products.

According to the available data by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), by 2006, the SME sector in Nigeria contributed about 75% of jobs for the population that were employed. Despite the major growth of the SME sector, a major challenge that many entrepreneurs face is financing. This will come as no surprise to even a casual observer of the Nigerian wide business environment, but what is interesting is that the size of funding typically sought, and the purpose intended, both fit well with crowdfunding. In many cases, funds are sought for innovation and new product or service development. Crowdfunding in its many forms is well able to provide such funding for a well-managed business or project, and the crowd-validation element of a crowdfunded business can bring considerable benefit to the entrepreneurs.

Profile

Ladi Belo, last child of Mr & Mrs Lekan Belo currently works at UBS Investment Bank, New York. His qualifications include BSc Management at The University of Manchester, MSc International Business at Aston Business School, MSc Innovation and Entrepreneurship at Warwick University. His interests include disruptive innovation, real estate and beverages.

Credit: Pocket Finance by Omilola Oshikoya