Crowdfunding to get money is rapidly gaining popularity as a way for start-ups to get their businesses going. It doesn’t require winning over investors, and it gains attention for your start-up before its launched. Additionally, it helps you evaluate what kind of demand there is for your product.
But even more, it gives entrepreneurs hope. So, if crowdfunding is well planned and executed, it may generate enough money for you to live your dream…
However, success doesn’t just happen. Indeed, with every success story comes a lot of guts, sweat and tears. In fact, running a crowdfunding campaign is no different.
What is Crowdfunding?
The digital economy has render new, exciting opportunities for prospective business owners. Indeed, crowdfunding platforms are innovations that render start-up businesses the opportunity to get money more easy for their planned business.
Crowdfunding is an online method to obtain money from large audiences, where each individual provides a small amount, instead of raising large sums from a small group of sophisticated investors 1. It is conveniently done via the internet and mostly without the presence of financial intermediaries.
How does Crowdfunding work?
For crowdfunding to be successful, there needs to be lots and planning and preparation. It is not something that you can let happen overnight. In fact, it involves a process with multiple stages, requiring different activities and focus 1 .
Furthermore, there are two distinct classes of crowdfunding – (i) investment-based and (ii) reward- and donation-based 2.
- Equity-, royalty, and lending-based crowdfunding: here funders act as investors or lenders. Therefore, they need to assess the risk of their investment, in other words, the expected performance of a successful campaign.
- Reward- and donation-based crowdfunding: funders mainly play the role of prosumers. As a result, small-scale funders are not necessarily interested in financial return of the campaign.
Types of Crowdfunding to get money
Simone Johnson, Business News Daily Writer described four types of crowdfunding:
Donation: Donation-based crowdfunding is when people give a campaign, company or person money for nothing in return. For example, you create a crowdfunding campaign to purchase new equipment for your company. In this case, the individuals who give you money do it out of support for the growth of your business and nothing else.
Debt: Debt-based donations are peer-to-peer lending, which is a form of crowdfunding. In debt-based donations, the money pledged by backers is a loan and must be repaid with interest by a certain deadline.
Rewards: This is when donors receive something in return for their donations. The size of the rewards usually depends on the size of the donation. Based on how much money participants give to a campaign, they may receive a token like a T-shirt, product or service – often at a discounted rate.
Equity: Equity-based crowdfunding allows small businesses and start-ups to give away a portion of their business in exchange for funding. Indeed, these donations are a type of investment where participants receive shares in the business based on how much money they contribute.
Pros and cons of Crowdfunding
Crowd Toolz in Medium listed the following pros and cons of crowdfunding:
Pros of crowdfunding:
- Control: One of the biggest pros of crowdfunding is that you get to be in charge of everything.
- Low risk: By taking small donations from a lot of people, you minimize the risk for your company.
- The ability to test: Crowdfunding allows you the luxury of constantly testing your design, marketing strategy, and more.
- Measure the interest: Is your product actually good enough? With crowdfunding, you can gauge public interest in your product before you begin working on it.
- Direct connection to customers: By seeking funds directly from your prospective customers, you’re establishing trust and loyalty with the people that will become advocates for your product. Indeed, an opportunity to establish an online community for your brand…
- Emotional investment: Customers who you directly engage with will be emotionally invested in your product and brand.
- Long term focus: With crowdfunding, you’re able to focus on long term goals instead of being pressured to produce short term results for investors.
- Unexpected success: Instead of having a cap on success, crowdfunding provides unlimited potential.
Cons of crowdfunding:
- It’s public: Crowdfunding is a public affair. It’s there for everyone to see, especially your competitors!
- A different audience: Instead of pitching to investors, crowdfunding requires you to modify your pitch to the general public. Speak to them in a language that they will understand.
- Crowded market: The crowdfunding market is saturated so you had better make sure your product is unique and offers clear benefits to your customer’s lives.
- You’re on your own: With traditional funding methods, venture capitalists and angel investors can open doors for you through their connections.
- Most campaigns never get funded: A large number of campaigns never reach their goal. However, your chance of success will improve when you know your funders and how to influence them to give money.
Once you’ve decided to use crowdfunding to get money for your venture, you should choose a crowdfunding platform.
A crowdfunding platform 1 is “an internet application bringing together project owners and their potential backers, as well as facilitating exchanges between them, according to a variety of business models”
There are many platforms that you can choose. Indeed, each crowdfunding platform specialises in different types of crowdfunding.
An example of a crowdfunding website is Uprise.Africa.
Crowdfunding is an exiting and potentially effective way to get money for your business. However, because it happens online, and the entry barriers are low, lots of prospective business owners and patent seekers are flooding the net looking for crowdfunding.
So, you should tell the would-be online investors or donors precisely, and convincingly why they should invest in you. For that you need an understandable but comprehensive business plan to sell your idea.
Just as important – you need a marketing plan to get your message to the right people!
- Shneor, R., Zhao, L. and Flåten, B.T. 2020. Advances in Crowdfunding: Research and Practice, Palgrave Macmillan
- Belleflamme, P., Omrani, N. and Peitz, M. 2015. The economics of crowdfunding platforms. Information Economics and Policy, 33:11-28.