Crowdfunding helps business owners to tap into the vast potential of the internet in order to raise funds for their endeavour. The approach doesn’t simply help entrepreneurs to find an inexpensive and relatively time-efficient way of securing funding for an idea, it also helps a company to connect to its customers and target audience.
Creating a crowdfunding initiative is a relatively straightforward process. There are plenty of dedicated platforms available in which to build a profile for your business or a specific product that you’re selling. Once you’ve established what your company is about, it’s important to set up a fundraising goal and promote your search for investors online.
(Market size of crowdfunding. Image: Statista)
If a prospective investor likes your pitch, they’ll offer cash donations to your business in exchange for either special rewards, discounts or levels of equity. Fundraising platforms make it easy for businesses to promote their calls for funding online to gain further interest. Let’s take a look at where the true benefits of crowdfunding lie:
The Advantages of Crowdfunding
There are widespread advantages across the board for smaller businesses when it comes to crowdfunding. Primarily, crowdfunding acts as an excellent way of finding funding for business while promoting the brand to prospective customers.
Fundamentally, crowdfunding helps to form a bond directly between a startup and its customers, as opposed to attempting to appeal at networking events to ambivalent VCs or angel investors. Entrepreneurs can use dedicated websites from the comfort of their own homes or offices to build support for the endeavour by reaching a broader range of investors.
Building interest in a new business, product, service, or idea can be as organic as getting family and friends to share your request across their social platforms, and as ambitious as launching a widespread marketing campaign.
Another significant advantage of crowdfunding is that the revenue gained can be looked upon as more of a business grant than a loan. This is because investors generally part with their money in return for rewards, products or services without intending to see a return on the money they’ve put into the endeavour. This facet of crowdfunding means that business owners won’t have to worry about paying back the funds or taking interest rates into account.
Interestingly, crowdfunding has also been found to benefit female entrepreneurs significantly. According to a report from PwC and the Crowdfunding Center, women worldwide are 32% more likely to reach their crowdfunding goals than men – meaning that women who are struggling to secure funding through venture capital firms could find what they’re looking for via crowdfunding.
The report suggests that crowdfunding actually helps to level the entrepreneurial playing field for women due to the fact that their business will be open to investment opportunities away from male-dominated venture capitalists. It’s also been noted that women can use more personal language in their pitches, which helps to forge better connections between businesses and their investors. Male entrepreneurs can occasionally come up short in this respect by traditionally opting for a more formal, jargon-filled approach.
The report features a reminder that crowdfunding is far from a flawless way of raising capital. In fact, despite women being more successful in gaining funding, just 22% of female-led campaigns reached their fundraising goal. This method of gaining capital leaves businesses unsure of exactly how much money they’ll be receiving, and if they fail to hit their goals, all the finance received will need to be sent back to fundraisers.
Highlighting the Approaches to Crowdfunding
Fundamentally, the two most heavily used approaches to crowdfunding revolve around rewards-based funding and equity-driven funding.
Rewards-based crowdfunding allows donors to receive products or services related to the business that they’re supporting, with specific rewards scaled up in order to reflect the respective levels of investment.
To illustrate this concept, if an author were to seek crowdfunding for their book, they could offer £10 investors with a soft-back copy, £20 donors with a signed copy, and £50 donors with a signed copy and their name in the credits page.
This form of crowdfunding means that entrepreneurs can gain money with little-to-no prospect of having to worry about a demand for a return on the investors’ level of funding.
Fundamentally, the rewards-based approach to crowdfunding might be a solid option for small businesses and startups that don’t want to lose equity to shareholders and are aiming to avoid the prospect of loan repayments later down the line.
Equity-driven crowdfunding, on the other hand, enables investors to attain a share in the company in question-based on their individual level of funding. Investors can cherrypick startups that they believe will become a success in years to come, and donate not just out of interest, but in expectation of a return on their investment.
While this approach could offer a greater financial burden to businesses, it’s still a great option for startups that have well-accounted for growth plans. Fundamentally, an endeavour that takes on equity crowdfunding will be left with investors to look out for, which may lead to some bumps in the road, but fundamentally is an excellent way of quantifying a great idea with a solid windfall.
The Road to Successful Crowdfunding
The rise in popularity of crowdfunding platforms means that your startup will need to stand out from a sizeable crowd of businesses, all looking to win the money of investors ahead of you. With this in mind, the most important thing your business can do is be visible to the crowds you’re looking to win over. Be sure to hit home with your unique selling point and offer enviable levels of rewards for contributions.
Another approach to winning funding from interested parties is to utilise a wide network of connections to promote your startup for everyone to see. Get friends and families to promote your business within their social channels and work on generating interest. If you don’t have much pre-existing interest in your product it won’t go very far in reaching its goals.
Weighing Up The Crowdfunding Alternatives
Crowdfunding may be an effective way of generating capital for your startup and building a little bit of advance brand recognition among potential stakeholders, but it’s fair to say that better long-term funding approaches exist. There are plenty of alternative methods available when it comes to financing your startup.
One such method involves gaining a financial windfall from both banks and credit unions. This more traditional approach to lending can help to ensure that businesses achieve exactly the right level of finance to help in the startup process as well as establishing a lasting relationship with a local bank should more financing be required in the near future.
If you’re unable to gain access to a bank loan, small business loans from online lenders can be significantly easier for businesses to get to grips with. While the cost of borrowing online is relatively high, for some businesses that have well-accounted for cash flow forecasts, it can be the shot in the arm that they need.
Elsewhere, business credit cards can give entrepreneurs access to large amounts of credit that can be used as and when it’s needed. Even if a startup doesn’t need too much of a financial injection, it can be beneficial to gain access to a business credit card and build its credit. This can make an endeavour appear more attractive to lenders in the future.
Finally, personal loans can work wonders to startup owners whose business is too new to qualify for a bank loan or business credit card. Here, it’s possible to consider a personal loan in order to help keep your endeavour ticking over in the short term. While personal loans tend to carry smaller sums, the rates are significantly lower than online business loans.