Crowdfunding has been a revolutionary force, particularly for smaller businesses and startups. By being able to bypass the usual funding structures and financing gatekeepers, we’ve seen a number of creative ideas that typically wouldn’t have been able to achieve the funding that they need to come to fruition.
It has also been an opportunity for these businesses to improve their resiliency, as crowdfunding doesn’t have the same catches as other forms of financing. With crowdfunding, businesses can retain their independence.
What is crowdfunding?
The typical way that a business raises capital is by finding an investor, and convincing them to provide a large investment of cash, in exchange for a certain percentage of the company. Investors do this because they like the idea and want to financially benefit from it, and the business owner needs the investment to scale their business up.
Crowdfunding is different in that it’s there for small organisations that may be struggling to find that angel investor that will take them under their wing. With crowdfunding, the business goes directly to the community to ask for money for the idea, and raises its pool of capital from a large number of small investors, rather than one single VC fund or angel.
So, for example, a company has a product in development, but needs a pool of money to finish the product and then take it to market. They might turn to a crowdfunding website like Kickstarter with their idea, and people that like that idea will support it with a small amount of money (often the cost of the end product). In return, the company can offer “rewards” for the investment, ranging from being added to an exclusive mailing list and having their name listed as a backer on the product’s website, to a copy of the product itself once it’s available, right through to a lavish reward for people that back the project with significantly more money. With crowdfunding, the better the idea, the more motivated “fans” will be and will back it with more money.
Crowdfunding can also be used in impact investing, where a large pool of investors can buy into a company that is out there to make a difference, but might be too great of a risk to be seen as a full investment opportunity. Supporting a company that promises to be a good ESG citizen with $100 is much more palatable than having to provide them with a $200,000 seed fund.
So, in short, crowdfunding is a social way of raising money that allows a lot of people that buy into the vision of the company and product to “chip in” with a negligible amount of money (for them), which can result in the company raising the money it needs to thrive.
What are the advantages of crowdfunding?
Smaller businesses and startups are flocking to crowdfunding models for many reasons. Some of the major advantages of this funding model include:
1) It can be a quick way to raise money. A crowdfunding campaign will usually run for around a month, and the company will have immediate access to the capital at the end of it.
2) It effectively works as market research. When you are crowdfunding, you are presenting a business or product idea directly to the audience that you want to reach. Their response can help to shape the product or business direction.
3) There’s a marketing component too. Popular crowdfunding campaigns tend to catch the media’s attention, which can in turn result in more project backers and customers in the long run.
4) You retain control. With crowdfunding people buy into the idea and company direction, rather than look to shape it. For particularly innovative, cutting edge or alternative businesses, this can be appealing, when traditional financing would result in the company needing to make concessions.
What are the disadvantages of crowdfunding?
Of course, as with everything, there are disadvantages and pitfalls which mean that crowdfunding might not be the right approach for your business and/or product idea.
1) It is a lot of work. Crowdfunding is a competitive space, and you’re competing for the consumer dollar in a lot of cases. This means that you need to spend a lot of time, energy and potentially even resources to ensure that the project is a success. Many crowdfunding projects have big marketing and PR budgets, which can somewhat undermine the goal of using crowdfunding to raise money.
2) Many crowdfunding sites operate on an “all or nothing” approach – at the start of the project you set a monetary target (the money you need for your idea or business to come to fruition). If you don’t hit that target, then all the energy and expense you put into the campaign is for nothing, as the pledged money is returned to backers.
3) IP thieves study crowdfunding websites. If you’ve taken your idea to a crowdfunding platform, but haven’t secured the necessary trademarks, copyrights and patents, then you’re leaving your idea up for grabs, and someone else can steal the idea. Even with protections, your success on crowdfunding could inspire competitive products before yours has even landed on the market, costing you the early moving advantage and the honeymoon period where an innovative and new product enjoys an effective monopoly.
As with all financing models, you need to weigh up whether crowdfunding will deliver the results that you’re looking for and benefit the growth of your business. However, with traditional financing being increasingly risk averse, for those with creative ideas that have yet to have a proven market, crowdfunding might well be the best way to validate genuine innovation moving forward.
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