Tapping the Wise Crowd's wallet

As early-stage financing gets even tougher, creative folk are reaching out to ordinary people for investment through an approach that's being called Crowd Financing. From a professional's point of view, when it comes to validating an investment proposition, there's nothing quite so compelling as seeing real people open their wallets, writes Hugh Mason.

Amongst those of us who finance creative enterprises, film-makers have a reputation for being some of the most inventive when it comes to cooking up new ways to back their ideas. For example, they've built an argument for tax credits that the UK Treasury, and numerous fiscal folk worldwide, have bought into.

Writing personally, I remain to be convinced that tax credits create either great content or sustainable economic growth. I am not at all sure the scramble of games companies and other content developers to jump on that particular bandwagon is well-advised. However, I do think the new concept of crowd financing, which seems to have first surfaced amongst wannabe film-makers, holds great opportunities for all kinds of creative enterprise.

There are variations on the theme but, in all of them, you use web communities to tout your idea to folk who might get it. If they do, ordinary individuals then pledge small amounts of seed money and, if you pull in enough pledges, you can make your idea fly.

Crowd Financing is still very new and, as I write, there isn't even a Wikipedia page about it yet but there seem to be at least four models possible:

• You could ask people to back a great idea and not expect anything in return. This is a kind of Web 2.0 version of old-fashioned patronage. As an incentive you could invite them along to a gallery opening, the first night of your play, or give them a bit part in your film. This kind of approach is probably most suited to social entrepreneurship or non-commercial art projects.
• You could invite sponsors, who get exposure in some form or other. Perhaps the most famous example is the million dollar homepage. Probably not a repeatable precedent in itself but it points the way to new possibilities.
• You could ask people to loan you cash on an unsecured basis. There are precedents in sites like Kiva, which allows ordinary people to back entrepreneurs in the developing world.
• You could offer some kind of equity stake in a business, whether in shares or some quasi equity of your own invention called 'idea beans' or whatever. However you do that, the trick would be to make sure it doesn't contravene regulations on soliciting investment

Whichever route you take, the idea is that good ideas will somehow break through the noise of people trying to raise money and will attract cash through The Wisdom of Crowds. Some writers link the idea to a bigger concept they call Crowd Sourcing, which would include finding spare labour to execute work (GetAFreelancer is one service facilitating that which I've used and found excellent)

Anyway, it's the Crowd Financing bit that most intrigues me and I am going to stick my neck out and predict that it's going to become a real phenomenon of the next two years. It seems to fit a future where we all have a lot less trust in financial institutions and those money men who got it so very wrong. Whether we like it or not, we are all going to have to trust our own instincts more and what could be more in tune with that than taking an affordable punt on something you believe in, particularly if the cost is no more than sponsoring your mate to run a marathon for a good cause.

That example of raising money for charity makes me realise that, of course, in many ways this is an old idea. I believe I am right in saying that, like many public monuments, Nelson's Column in London was 'erected by public subscription' - in other words, ordinary people chipped in to make it happen. Likewise, if you look at old books from the 18th Century you will often find a list of subscribers at the start - people who punted up cash so that the author could take the time to write the book - and got a copy plus their name immortalised at the front for doing so. Stretching my metaphor to breaking point, I guess you could say that the public response to the death of Princess Diana was a 'crowd financed' event - the establishment was taken aback by the public demand for a big funeral when royal protocol set out something a lot more modest for an estranged Princess of Wales. My point is that, before the age of web communities, it was only famous 'established brands' like Nelson or Diana, or individual scholars with a reputation amongst well-heeled friends, who could raise the cash from a crowd. Now, anyone with a good story to tell about their project has a crack at it.

If Crowd Financing does take off, it could offer creative individuals and first-time entrepreneurs the capital they need to get going in a way that's been difficult to date because of the often-differing agendas of the different people involved. Especially if you work outside the film industry, stick with me while I indulge my as-yet-undiscovered screenwriting talent to illustrate how not to seek investment and why the old approach sometimes doesn't work:

SCENE 1 - FADE IN
A butler walks to the letterbox and bears his Master's mail in gloved hands to the pantry. We watch in closeup as it is ironed. Reverently, the mail is taken on a silver salver to the morning room.

A copy of the Financial Times twitches. We do not see his face, yet the setting tells us we are sharing the point of view of a High Net Worth Individual at his breakfast. The camera settles on a slick-looking prospectus offering the chance to stash Sir's cash in a slate of sure-fire blockbusters.

Closeup marmalade spreading. A crunch of toast and then a pregnant pause.

Sir is drawn in by the picture of a Hollywood starlet in a mocked-up poster on the front cover. The films are all still in development, of course, and the small print carefully disclaims that the big-name actors cited haven't actually committed yet, as such. However, the charts making comparisons with the top 10 movies of the last decade look very professional. There are lots of big words about the tax stuff and a photo of some serious looking Men In Grey Hair. Their impeccable reputation will ensure everything's looked after (for a fee).

SCENE 2 - The Library
Seated alongside one of the Men In Grey Hair is a thrusting former investment banker, making his pitch.

JUMP CUT TO - the same scene but now the folks making the pitch are naked
The thrusting young banker reveals that he has secretly wanted to make movies since he was 14. Back then, Mum and Dad told him to go and study accouting, but now he's putting that right. And hoping to sleep with a few up-and-coming wannabe actresses at Soho House. The project would be immense fun and of course there would be a cameo role for Sir's mistress, giving her a world-wide showcase for her karaoke talent.

It's the finale of the pitch and the Man in Grey Hair nods encouragingly.

After a beat, Sir asks a question:

"So how, exactly, do I get my money back?"

One film project that probably won't make it to the big screen ... but not so very far from a scene that plays regularly. Here are three key challenges:

1. The "ask" to the investor is a big one, even for a 'low budget' feature. Every film-maker starts out believing they have a blockbuster on their hands, but the stats show otherwise. It feels like a risk and even the clever tax credit stuff sounds kind of phony after a bunch of other clever financial schemes came tumbling down.
2. If there's money to be made here, how come there is massive over-supply in the film industry? How come you never see men, women and children crying in the street because cinema screens are dark?
3. Just how is a feature idea that no distributor will touch ever going to break out of being highly acclaimed at a film festival?

Ok - enough - I really don't want to seem like I am beating up on the laudable ambitions of film-makers.

My point is, the three challenges they face are the same for anyone looking to get a new enterprise off the ground:

• How do you mitigate risk for an investor when most new ideas don't take off?
• How do you create a sense of 'gotta have it' in the marketplace rather just adding a marginally better 'Me too!' proposition against established alternatives?
• How do you get your product or service noticed if folks with the power to endorse it won't back it?

The reason I'm intrigued in crowd financing is that it seems to hit all these bang up front at the start of financing an idea. The risk for any individual investor is small because you are only asking them to punt a marginal amount and, in turn that allows them to spread their risk across several projects/businesses.  The feedback you get from the crowd (either they invest or they don't) lets you know very directly if the idea is going to get market traction. Finally, every one of your investors becomes an ambassador for you in the marketplace, blogging about you etc so you start to build a reputation and get exposed to potential customers.

So often I see business plans and there's this story when you read between the lines:

If only someone would invest £100k / £1m (delete as applicable), then the brilliance of my idea would shine out to the world - oh and by the way - you money people will get really rich too

That's so lame!

I wrote recently about someone I mentored who (all thanks to her own efforts, not mine) raised £260k. The overwhelming thing that came through to me about her story was the way that she had used a very small seed of initial investment to get something up and out there, then she'd thought very hard about it and changed her ideas, in response to what the market told her that it wanted.

What she didn't do was start with some kind of messianic arrogant view that she knew best, try to find a schmuck to finance it, then fall flat on her face when actually the little people out there wanted something a tad different.

Crowd financing kind of builds that in from day 1. It's a way to get in touch with that group of 'early adopters' who will see the merit in an idea, punt a few quid on it and allow a creative or technical team to try something out. Once the idea is proven and you need the big money to take a business on to the next level, a crowd-financed entrepreneur working in any sector would have a really strong argument to put to investors that the market for their idea was real.

There are some down-sides, of course, like the requirement to disclose the idea in public when it's at a very early stage. Crowd financing won't replace the more traditional approaches to early-stage finance completely but I for one can only see it as a great idea. I note that someone's domain-squatting on crowdfinancing.com but elsewhere there must be people starting to set up sites to make it easy. Now there's an idea for a business ...  I wonder who'd back that? Want to chip in a fiver?

If you have a new product or service that needs financing, and you're based in London, the g2i program might be able to help you. Thanks to funding from the London Development Agency, it's free to register.