As any entrepreneur who has gone through the process will tell you, securing start-up financing is one of the most difficult parts of getting a business off the ground. The process begins with the creation of a well-researched and comprehensive business plan. For years, this document would be taken to a financial institution angel investor or venture capital firm, where your plans would be dissected to see if they merited investment capital. Like a lot of traditional business concepts, this tried and tested method of securing capital has been turned on its head, largely thanks to the internet and crowdfunding.
What is Crowdfunding?
Rather than receiving a large dose of financial support from one wealthy organization, crowdfunding spreads the risk among a collective of smaller investors, usually without any form of collateral. It allows friends, family, customers and individual investors to show confidence in you and your product by supporting you financially. This initial injection of financial support can allow an entrepreneur to take a product from the prototype phase all the way through to production, without having to provide the collateral needed for a traditional business loan. Instead, investors can be rewarded in a myriad of other ways, from equity to exclusive rewards or first access to the initial run of the product.
The Benefits of Crowdfunding
Crowdfunding presents a more flexible, easier and potentially lucrative way of securing start-up financing. Here are some of the key benefits of crowdfunding:
- More Eyeballs – Key crowdfunding platforms such as Kickstarter and Indiegogo are a well trafficked marketplace for investors. Launching your crowdfunding efforts here puts literally thousands of eyeballs on your product, while opening a direct line of communication with interested parties. The onus is on you to make sure you nail the…
- Presentation – While the platforms mentioned above receive thousands of visitors, they also host thousands of crowdfunding campaigns. You must ensure you present your product in an attractive and memorable way. Nailing the presentation early will be a huge advantage for your business, as you drill down into your unique selling point and how to best communicate it to potential investors.
- Marketing – Gaining traction in your SEO efforts can be a slog. Hitching your wagon to an already established crowdfunding platform gives you a built-in audience while you slowly drive traffic to your own website using tactics like social media, e-newsletters and blog posts.
- Instant Validation of Your Concept – Crowdfunding platforms perform the role of a digital shop window. Customers can provide instant feedback on your concept by voting with their wallet. It provides plenty of scope for A/B Testing until you find the right mix that’s attractive to consumers.
Types of Crowdfunding Available
Depending on what you hope to achieve with your crowdfunding campaign, there are several different options to choose from.
Perhaps the most relevant to small businesses, rewards-based crowdfunding allows investors to hand over an investment sum in exchange for a reward. This can take the form of a pre-order bonus, a first-run copy of your product or some other unique perk not available to the general public. It’s advantageous for the business owner as it allows them to offer a tangible reward without incurring extra expense or giving up equity in return. Which brings us to…
Ever watched Dragon’s Den? Equity-based crowdfunding functions in much the same way, with investors receiving a small piece of the company for providing capital. It’s popular with capital-intensive start-ups, but isn’t recommended for smaller businesses. If you can get funding without handing over part of the company, why would you?
Looking to start a triple-bottom line business? A Donation-based crowdfunding model allows individuals to invest in your mission without receiving anything in return. This model has been popularized on sites such as GoFundMe, where charities and non-profits use it to raise funds, or individuals use it to cover sudden costs such as medical bills.
Find Out More
GD Commerce is well versed in advising businesses if crowdfunding can work for them. Contact us, and we’ll be delighted to discuss your individual circumstances.