To jump-start a project, many entrepreneurs raise the first few thousand dollars from friends and family. Then, and once the project gains recognition and popularity among their closer circles, it’s time for the second round of financing, i.e., raising external capital. Although the second round is more challenging, mainly because it entails considerably higher amounts of money (usually a few hundred thousands’ dollars), it turns out that even raising the initial investment is no piece of cake.
So where do entrepreneurs get their money from? It may or may not come as a surprise, but there are myriad funding and financing possibilities that can help entrepreneurs breathe life into their idea and dream; investors, incubators, VC’s, angels, non-bank loans, as well as crowdfunding and peer to peer lending platforms.
With their fingerprints everywhere, social networks affect every aspect of our lives. Using them, entrepreneurs can raise money from the public to help propel their idea and bring it to life. It’s not just Kickstarter, Indiegogo, and GoFundMe. There are many crowdfunding possibilities and opportunities; some even specialize in technological ventures.
Although crowdfunding has a long history, over the last couple of years it gathered considerable momentum. Equity crowdfunding, however, boosted after the American JOBS Act in 2015 that was followed by the Regulation A+, both with the intent to enhance the ability of smaller American companies to raise money. The effect of these legislations reached far beyond the USA as the UK quickly joined the trend. Using social networks and web-based equity crowdfunding platforms, startups and early-stage companies can raise funds from the public in exchange for shares. Israeli startups too can use these channels and are no longer restricted to raising capital locally.
On the other hand, and from the investors’ point of view, equity crowdfunding offers attractive investment opportunities they did not have before, including joining investor groups that up until now were closed and exclusive. If previously investors used to invest in savings accounts, trust funds, bonds, and the like, today they can put their disposable income to work in hi-tech ventures which can yield high returns, particularly since banks’ interest is close to nothing. Also, using these platforms, investors can hand-pick the businesses that are near to their heart. To mitigate their investment risks, they diversify their portfolios by investing in initiatives belonging to different sectors. Hence, the success of one investment will cover the losses if the others fail.
Crowdfunding is primarily practical for the early stages of a venture, and when the amount for raising is not too large. In Israel, there are two main crowdfunding models for startups and entrepreneurs. The first is based on the traditional crowdfunding method whereas the entrepreneurs offer, and the investors get, once a venture reaches its target, a service or a product in exchange for an investment. This method of pay today and receive the product tomorrow, namely, when it’s ready, offers products and services at a substantially reduced cost compared to the market’s price.
The second prevalent model for Israel-based entrepreneurs seeking early-stage funding is peer to peer lending. Similar to a traditional loan, peer to peer lending, or P2P lending, is a lending method whereby the entrepreneur commits to returning the loan with a known interest rate within a given period. Loans are an ancient financing instrument which the intelligence era has transformed into online initiatives like the Israeli TARYA, eLOAN, and blender that are readily available to anyone with no more than a billable account and a smartphone with an internet connection.
Last but not least; before rushing into any fundraising or financing venture, entrepreneurs need to study each opportunity carefully, and more importantly, before sharing an idea or announcing it publically, they should make sure they have taken all the necessary steps to protect their intellectual property.
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