Crowdfunding is something that you’ve more than likely heard all about. It’s essentially a highly effective method of raising capital, through the combined effort of family, friends, customers and investors. It’s a popular way for people to raise the money they need, to grow into the company that you always envisioned, and in a relatively easy, cost-effective way. Many start-ups have chosen to go down the crowdfunding route. We’ve compiled together a guide to crowdfunding, which will hopefully help you decide if this is a journey you’re going to go down. Let’s dive in.
Darren Balcombe is the Deputy CEO of Capital Enterprise, an organisation dedicated to start-up growth. With over 13 years of international experience in start-up advisory, Darren has worked across multiple industries to empower start-up founders and businesses to achieve growth.
Why is it different?
How is crowdfunding different from other forms of raising money? It’s actually quite the opposite of the mainstream approach to the financing for a business. Traditionally, if you wanted to raise capital for a start-up, launch a new product, or market a new service, you would have to pitch your idea to several wealthy individuals. This would include banks, angel investors, and venture capital firms. Arguably, this is a limited range of people to go to for help - and if the “risk” was too high, there would be very little chance of ever gaining the money. If you fail to pitch well, or that particular investor isn’t interested, you’ve lost time and money. By contrast, crowdfunding platforms give you a platform to showcase a pitch to a plethora of different people, enabling you to reach the right people, and save yourself time - while raising the funds necessary.
The benefits of crowdfunding
We touched on the benefits briefly, but crowdfunding has a range of advantages and perks - from reaching a wider investing pool to more flexible options, it’s unsurprising why so many businesses have chosen to go down the crowdfunding route. Below are the benefits of using crowdfunding, rather than traditional forms of raising capital.
Reach
The main benefit of a crowdfunding campaign is that you can reach a multitude of different people, that are more likely to be interested in your project. Investors, friends and families can also share your fundraising campaign, making it easier to get noticed and interact with many people.
Marketing
In the same vein, crowdfunding is a great marketing technique too. You can share and promote your campaign in many different ways, and gain a loyal following and customer base before your venture even begins.
Presentation
Creating a crowdfunding campaign means that you can create a presentation that reflects just how much you have to offer. Many companies don’t get to research their own business in this way, which proves to be a big benefit to you and your enterprise.
Efficiency
With crowdfunding, you have one centralised platform that you can funnel all of your investors towards. This makes everything easily comprehensible, which is great for start-ups that value accessibility and simplicity.
Validation
Lastly, the psychological benefits of gaining validation from multiple different people, from different backgrounds, will only improve your confidence. In turn, you will be better able to sell how amazing your concept is, and win more people over.
The different types of crowdfunding
One of the main concerns regarding crowdfunding often falls with the fact that many don’t feel that there will be the same kind of flexibility as with other funding options. This isn’t true. Crowdfunding comes in a variety of different forms; which one you choose depends on the product or service you offer, and your personal goals. The three main types are donation-based, rewards-based and equity-based. We explore these different types below.
Donation-based
This is any crowdfunding campaign that has no financial return to the investors or contributors. It doesn’t necessarily have to be a charitable project or company - it could simply be you asking people for donations from the kindness of their hearts. That being said, the majority of donation-based crowdfunding initiatives are for research or charitable purposes - for example, two donation based crowdfunding campaigns I’ve seen recently were asking for help with medical bills and ocean research. In terms of business, this perhaps isn’t the most popular form of crowdfunding, but it can still be effective, in particular if your product or service has the possibility of making a real change.
Equity-based
Equity-based crowdfunding allows contributors to become part-owners of your company. Essentially they trade money for equity shares, meaning you get the funds for your start-up, and they get to own a little bit of your company. As equity owners, your investors gain a share of your profits - this may be one of the more popular forms of crowdfunding and is typically a lot more like your traditional forms of raising capital. The difference is, you have the potential to reach more investors. However, for many companies that don’t wish to give away ownership, this may not be the route they want to take.
Rewards-based
If you want something between donation-based and equity-based crowdfunding, rewards-based might be the best option for you. This is where an individual contributes to your business, and in exchange, they gain a “reward”. This may be in the form of a product or service that your company offers. This is a very popular option, especially for those who want investors but don’t feel comfortable trading off shares of their company. Platforms like Fundable, Patreon and Kickstarter, all thrive on rewards-based crowdfunding. A few examples of rewards which may work for you are:
- Pre-orders: You give backers a copy of the product that you’re trying to raise capital for
- Recognition: In the modern world, even a small shout out can be enough for many people. They can donate a small amount and they’ll get mentioned on their website
- Services: You can offer to write code, or edit somebody’s writing for a small fee. You’ll be surprised at how much money you can make from this.
Overall, crowdfunding can be an effective way to earn money for your passion, reach new people, and get your vision off the ground - without having to follow the traditional route.
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