Crowdfunding has become all the rage, but to many this concept is still quite foreign. It is a wonderful alternative way to obtain financing for your venture, bypassing a lot of the red tape and obstacles faced by start-ups and early stage businesses, such as providing the security required by traditional financing options.
There are a number of different platforms, all with slightly different features, that facilitate crowdfunding – some based locally and some international. In short, it is an online system where you can market your product, service or idea and hopefully raise funds from a large number of participants worldwide in advance to make those dreams a reality. Your idea does not even have to be a business! Social causes and other non-profit ventures have had much success with crowdfunding.
There are a number of different ways in which you can utilise crowdsourcing to raise funds, including:Donations: Participants support your campaign by simply donating money toward it, having no expectation of any reward.
- Debt Funding: Participants contribute money toward the campaign as a loan, expecting the capital and some form of return on equity such as interest once the enterprise reaches set milestones.
- Equity Funding: Participants contribute money towards the campaign in exchange for equity in the business, with an expectation of a worthy return on capital.
- Pre-Sales: Participants buy your product in advance (mostly before production even starts) at a discounted price.
- Purchasing Experiences or Unique Items: Participants can support campaigns by purchasing unique experiences such as dinner with the campaigner, or a hand-drawn sketch to help raise funds.
So, to begin you will choose a crowdfunding platform based on your individual needs and preferences. All of them have slightly different processes and features and it is important that you are fully aware of these. You then have to package your brilliant, well thought-out idea and make it as visually attractive and informative as possible, especially in a digital format. Your campaign video for instance is the most important tool you have to explain and sell your campaign. The challenge is to get your product, service or idea noticed amongst all the other great ideas marketed on the platform. You have to decide on what terms you attach to your proposal. For instance, you have to state the minimum amount of funding you need to be able to proceed with your enterprise (and therefore for your campaign to be a success). You can opt for a fixed “all-or-nothing” goal, meaning that if you did not reach your minimum amount by the end of the campaign, your supporters will be refunded their contributions and you will receive no money. Alternatively, you can opt for a flexible goal, meaning you will receive all contributions made by supporters whether you reach your set goal or not. You have to set a number of days that your campaign will run, during which time people can contribute to your campaign. During your campaign it is wise to frequently engage with your audience and even update your offerings if possible, based on feedback.
Once your campaign has ended, the platform hosts will transfer the funds raised to you, minus their agreed costs. Some platforms offer the option of people continuing to contribute even after your campaign has ended due to its popularity.
As simple as this sounds, this market is fast becoming a specialist area on its own, with marketing campaigns now designed around the launch on the platform to increase chances of success. Some platforms offer various levels of support during the campaign and can even be contracted to assist with the fulfilment.
Crowdfunding offers a significantly simpler and quicker access to financing, especially for start-ups. To my mind, one of the biggest advantages of this concept is that your product, service or idea is already validated as successful or not before you fully launch your enterprise. Customer feedback is immediate, which allows you to tailor or change your offering before production starts, potentially saving you an incredible amount of time and money. On the downside, participants have to keep in mind that the crowdfunding industry is still somewhat unregulated, which certainly poses risks for all involved.
Although traditional financing methods will always have a place, these alternative and innovative ideas are changing our world forever. However, I expect this will evolve more and more and we as business participants will need to understand, adapt and use this to our full advantage.