The start-up entrepreneur's alternative to raising capital by using the power of the crowd
Raising capital. Two words that start-up entrepreneurs are all too familiar with. There is no shortage of stories about the brutal process of raising money. Founders spend hours of their time pitching their ideas to investors, and when (or if) they finally do get the funding they are under massive pressure to produce results. In the process, they have likely already given away a large portion of their equity. To make matters worse, 50% of newly opened businesses do not make it to their 5th year of operation¹. So even if the entrepreneur secured funding, there is a high likelihood that they will fail and need to start the entire process from the beginning. It is a nightmare.
But what if there were a different way of getting the resources needed to launch an idea? One that transfers equity directly to the people who produce results for you, instead of trading equity to investors for their money. This is the core of Equity-Based Crowdsourcing: the process in which you go directly to people who produce the results that will help build your business.
Engaging the Crowd
In this example, you’re a new entrepreneur just starting out. You have a great idea that you’re excited to bring to life. In order to do that, you need a team of people. To hire this team, you need money. To raise money, you go to investors. If you’re compelling in sharing your vision, the investors give you money in return for equity in your company. With this money, you now hire your team and get to work - until the money runs out, and the cycle repeats. This is the traditional approach.
In equity-based crowdsourcing, the cycle is shorter and much more efficient. Instead of inspiring investors to trade their money for your equity, you inspire the crowd. In sharing your vision with the crowd, you attract a group of people who believe so deeply in your cause that they adopt it as their own. They become your team and work with you to bring your vision to life. As they work, they earn equity from their results. They are invested in your success since it increases the value of their equity. In other words, their successful efforts convert directly to increased value of their equity.
Success with the Crowd
The key difference between the traditional approach and equity-based crowdsourcing is what happens to the equity. With the traditional model, you work with investors to convert equity to money. Then you work with your team to convert money into work and results. If successful, those results can be converted into more equity/shareholder value, which then allows you to raise more money, and so on.
With equity-based crowdsourcing, you start with equity and convert it directly into results. By inspiring the crowd to join your team, you find people as passionate about your idea as you are. Equity goes directly to the people working on your big idea. In addition to the satisfaction of bringing a great idea to life, the team is rewarded with seeing their equity grow.
Crowdsourcing is a tool, and it doesn't have to be used alone. This is to say that equity-based crowdsourcing can augment what you are already doing with investors. You can still raise money with investors, even while the crowd is working on your idea. It’s the best of both worlds.
To learn more and to see examples of other types of problems that can be crowdsourced, visit our Resources page at www.crowdpiper.com. If you have specific questions and would like to speak with an expert — email us at email@example.com.
Top 6 Reasons Why New Businesses Fail. Investopedia.. https://www.investopedia.com/slide-show/top-6-reasons-new-businesses-fail/ [Accessed 23 May 2019]
Small Business Owners: American Dream Is out of Reach. (2018). Lendio. https://www.lendio.com/blog/small-business-tools/small-business-cut-off-american-dream/ [Accessed 23 May]
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