Developing a new project or launching a new start-up requires financial support or backing, which in many cases, most budding entrepreneurs do not have. But fortunately enough, there are many ways to raise the capital, such as leveraging on relationships with family or friends, finding investors, getting a loan from a bank, or taking up a relatively new method called the crowdfunding to kick-start your new business.
Hence, in this article, we will explore what crowdfunding is, how its helpful, and share some pros and cons that may help you and your business along this challenging journey.
What is crowdfunding?
Crowdfunding is a method of raising funds for a new product that you are considering developing or are developing through a collective effort of acquiring small contributions on a single platform from family, friends, supporters, and investors.
In recent years, several crowdfunding platforms have emerged. Some popular platforms include Indiegogo, Patreon, and Kickstarter. Remember that if you want to launch a successful crowdfunding campaign, you need to put in the time, effort, and patience, and most importantly, devise a well-thought-out plan to increase your chances of meeting your goals.
What are the different types of crowdfunding platforms?
There are different crowdfunding models available at your disposal. The most popular models are:
- Reward crowdfunding
Through a rewards-based crowdfunding model, people contribute to your business in exchange for a reward, typically the product or service you provide.
- Donation crowdfunding
Generally speaking, donation-based crowdfunding refers to any campaign without financial return to the investors or contributors. Some donation-based crowdfunding initiatives include fundraising for charity crowdfunding , disaster relief crowdfunding, emergency crowdfunding, and medical bills.
- Lending-based or debt crowdfunding
This method, called lending-based or debt crowdfunding, involves borrowing money for a limited time and then returning it with interest. Using this method, you will be able to borrow from multiple investors and not just a single investor during a specific period.
- Equity crowdfunding
Through equity-based crowdfunding, contributors can become part-owners of your company in exchange for equity shares, unlike donation-based and rewards-based methods. You share your profits with equity owners in the form of dividends and distributions as the result of their investment.
How does crowdfunding work?
Before signing up to a crowdfunding platform, be sure to have the following in hand:
- Create a detailed product or service description
- Stipulate the amount of money required and how the money is allocated, and what for
- Mention the type of crowdfunding you require
- Specify the duration of the investment round
Once you are ready with the specifics, you can move on to the following four-stage process mentioned below:
- Project Assessment
The first stage is the project assessment stage which occurs after submitting your idea to a crowdfunding platform. Professionals working for the platform will assess the information furnished by you and decide whether the project is viable for their audience.
- Publication stage
The publication stage occurs when your company has the green light to go ahead. During this stage, your project is published on the platform for a specific period.
- Promotion stage
In the promotion stage, you must market your campaign to as many people as possible. You can spend money on advertising on the media or advertise it on social media channels to as many people as possible to increase your chances of receiving the required funds.
- Project closure
After the allotted time has elapsed, the project will be closed, and the amount raised will be tallied.
What are the advantages of crowdfunding?
There are many advantages to crowdfunding. Some of them are:
- Crowdfunding is an effective and quick way for you to raise funds without having to pay a fee to do so.
- Online pitches can be an effective form of marketing that can result in media coverage for a project or business.
- Sharing your campaign details online may help you connect with subject-matter experts who can provide you with feedback and insights on how you can improve.
- Crowdfunding can help you gauge the public reaction to your product or idea. The more people invest in your product or service, the better your chances of it being a success.
- Through this method, you will be able to meet new people whom you can, in time, convert into loyal customers.
What are the disadvantages of crowdfunding?
The disadvantages of crowdfunding are:
- Crowdfunding is not as easy as it seems, and not all project proposals submitted to these platforms are approved.
- You will need to work to generate interest in your campaign before it is launched. In such a situation, you must spend money and time.
- If you cannot meet your target amount, any funds raised or pledged to you will automatically be returned to your investors, leaving you with nothing.
- If you create a campaign without adequately protecting your business concept with a patent or copyright, you risk someone stealing your idea.
- If you have miscalculated the rewards or returns, you risk giving away too much of your business to the investors.
Crowdfunding is an excellent way for an entrepreneur to raise money to fund a start-up without having to risk collateral. If you use the mentioned steps and create a compelling campaign that may resonate with investors, there is a high chance your business will succeed. But do keep in mind that some crowdfunded projects can still fail. Be sure to consider all of the pros and cons, and for your protection, seek legal advice before you proceed.