Last month we gave you some guidance on raising finance for your business and suggested that there may be options available to you other than via the traditional route of bank borrowings.

One such alternative, which is now entering the mainstream, is known as ‘crowdfunding’ (alternately equity crowdfunding or hyper funding). Crowd lending from non-banks is gaining momentum globally as banks have increased interest rates or imposed greater restrictions on lending to consumers and small businesses.

Crowdfunding essentially describes the collective effort of individuals who network and pool their resources, usually via the internet, to support efforts initiated by other people or organisations. The origins of crowdfunding can be traced back to the mid 1990’s and it has previously been used for a diverse range of activities, for example disaster relief, political campaigns and scientific research.

Given the banks apparent unwillingness to lend, this alternative form of business finance is proving to be particularly attractive to start ups – especially those in the music, film and technology sector.

One example of where this alternative method of finance has been used successfully is award winning software vendor Trampoline Systems whose product helps customers increase the win rate in B2B sales.

Company founder Charles Armstrong spent several years studying how social networks operate in small island communities – for example on the Isle of Scilly. A chance encounter on the Isles of Scilly with the head of the San Francisco Stock Exchange (somebody give me the odds on that one!) led him to realise his research might have commercial potential.

In 2009 due to problems with a major investor they were forced to seek alternative means of finance and thus they became the world’s first technology business to raise finance through equity crowdfunding, The company announced a programme to raise a total of £1 million spread over four rounds and have now gone from strength.

However whilst crowdfunding was very effective for Trampoline Systems, there can be a number of drawbacks. For example:

Once a new idea is posted on a crowdfunding site, there’s always the risk of the idea being copied and developed ahead of you by better financed competitors. So beware – make sure you file your Patent Applications first!

From the investors’ perspective, there is some research in social psychology that indicates that, like in all investments, people don’t always do their due diligence to determine if it’s a sound investment before investing, which leads to making investments decisions based on emotion rather than financial logic!

A UK business must comply with FSA regulations, since soliciting investments from the general public is most often illegal!

And finally, there’s no doubt crowdfunding draws a crowd – investors and other interested observers who follow the progress, or lack of progress, of a project. However sometimes it proves easier to raise the money for a project than to make the project a success. Managing communications with a large number of possibly disappointed investors and supporters can be a substantial, and potentially diverting, task to put it lightly!

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