The concept of crowdfunding is a relatively new one. It’s been around for a little over 10 years. Primarily, crowdfunding is driven by the World Wide Web as most, if not all, crowdfunding platforms are online. The fact that it’s an online activity makes crowdfunding appear a relatively easy way of getting the funds you need to get control of your cashflow and promote growth in your business.
However, there are challenges to getting the right funding. You have got to put in a lot of leg work to establish your project as one that is viable enough to attract backers in the first place. You’re not guaranteed to succeed in getting the funding you need. And as crowdfunding has increased in popularity the ‘savvy’ of potential investors has also increased. Crowd funders are becoming more discerning and selective in the projects that they choose to back.
You need to have the winning combination of strong marketing, solid, trustworthy management and a quality product or valuable service.
Take a look at our guide to funding on how we can help you with planning to succeed in funding your cashflow needs.
Because it’s largely online crowdfunding can be seen as deceptively simple. You need to remember that there are no short cuts. Here is how to navigate through the minefield:
- Types of crowdfunding
- Reasons for choosing crowdfunding
- Selecting a platform
- Preparing your pitch
- Engaging the crowd
- Alternatives to crowdfunding
Types of crowdfunding
There are three types of crowdfunding to consider:
- Equity crowdfunding: People invest in exchange for an equity share in the business, with the risk that their share value may fluctuate as the business grows
- Rewards-based crowdfunding: Contributors either pre-purchase your product or service or receive other kinds of tangible compensation such as merchandise. Rewards-based crowdfunding is best suited for pre-revenue companies looking to find market validation for their product or service and is also often used as a general pre-sales/marketing campaign when launching a new product or service.
- Donations crowdfunding: People donate money simply because they believe in the cause. Investors do not expect to see a return on their donation, instead they may be recognised by a more intangible reward such as an acknowledgment, regular news updates, discounts or free gifts.
Reasons for choosing crowdfunding
The obvious reason for choosing any form of business finance is injecting cash into your business in order to fund growth. Equity and debt crowdfunding options are the most suited to serious business investment. Rewards and donations-based crowdfunding options tend to be more suited to early prototypes, artists, film makers and musicians trying to get their next project off the ground.
As it becomes easier to gain capital through equity crowdfunding campaigns, the number of start-ups relying on crowdfunding to raise funds and grow their business continues to rise. We’ve put together a list of the top 10 benefits of equity crowdfunding for start-ups.
- Provides access to capital without relying on a bank. Equity crowdfunding allows you to find interested investors who have the funds to back your business.
- Minimizes risk because crowdfunding relies on a large pool of investors who invest at lower levels, spreading the overall risk.
- Your investors can become personally invested in your business and may dedicate themselves to making your venture successful. You can get feedback, comments and ideas, which could be invaluable held during the early stages of your business’ lifecycle.
- As your business grows your investors from your crowdfunding campaign are still involved – and they’re more likely to invest in future ventures.
- A successful crowdfunding campaign can give your venture credibility when approaching angel investors, demonstrating your value proposition to other investors.
- Introduces prospective customers to your venture and pre-sells your concept. With an equity crowdfunding campaign, your investors become your early adopters. As you pre-sell your concept, gain insight into user reactions and analyse the market, you’ll be able to adjust your business plan or plan for growth as needed.
- Crowdfunding is relatively affordable making it accessible for most start-ups. Many crowdfunding platforms charge nothing to start your campaign, and only take a small percentage of your funds if the campaign is successful.
Selecting a platform
Crowdfunding is simpler than many other traditional forms of investing. You simply choose the right crowdfunding platform for your needs and then use it to spread their message to potential investors.
But the platform you choose does need to have synergies with your business. Choose a platform that has campaigns investing in similar types of operation to yours. So, you will need to do your research.
See out blog on the top 5 crowdfunding platforms.
Preparing your pitch
You will need to introduce your pitch answering the following who, what, where, why, when and how. Introduce yourself and who else is responsible for running your business. What is your business and why are you seeking funding and where are you going to seek funding? When will you need it and how do you propose to spend the funds?
How you pitch your business on your chosen crowdfunding platform is important and you will need to put some time and effort into planning and execution. Have a clear title and a short description ready for your pitch.
Have a look at your own network first. List all your friends, family and connections past and present. The more people on your list, the more visible your campaign will be and the wider your potential network of investors will become.
Work out much funding you will need and tailor your pitch accordingly. Make sure your business accounts are in order and be prepared for a financial review or an audit.
Ensure you understand the rules of your chosen platform because they vary from one to another. And. Although this might go without saying, make sure you read the terms and conditions carefully.
Once you have planned your pitch make sure you keep things concise and to the point. Modern attention spans are getting shorter and shorter. You will need to get to the crux of your offer quickly.
If equity raising then you need to have raised a third of your target before you launch in order to be a success!
Engaging with the crowd
Your crowdfunding platform can act as a marketing tool. By incorporating social media and digital marketing you can use your crowdfunding to direct traffic to your website. Crowdfunding campaigns are easy to share, so your investors can easily spread the buzz about your business to their connections.
For this to work you will need to keep in touch with your funders and ensure you communicate how your business is progressing. Use all the social tools at your disposal and make sure you post regularly.
Alternatives to crowdfunding
There are some alternatives to crowdfunding which are also non-traditional forms of business finance that might suit you.
Peer-to-peer lending
P2P lending is a good plan if the loan being sought is for a single purpose over a fixed period of time. Even better if the company is in a strong cashflow position and has assets to secure against the finance. Asset-backed debt will always help to keep the interest rate lower and a good cash flow reassures investors that late payments are unlikely. Conversely, it’s not an ideal option if you feel the regular repayments will be too much of a burden on your business.
Invoice finance (Business to business only)
Invoice finance works on the basis of releasing funds that are held in your unpaid invoices. You effectively raise finance against debt owed to you. Invoice discounting allows you retain control as well as an element of confidentiality; your customers will not be aware that you have a third-party finance company involved because all payments and communications will be direct with you.
Asset finance
Asset-based lending allows you to maximise available cash by securing funds against collateral already held within your business. And because these assets are readily available, you won’t need to sacrifice shares in your company.
It’s a cost-effective way to raise funds and compares favourably to traditional funding channels. And as a revolving form of finance, the available working capital can grow in line with your business.
Merchant cash advance
A merchant cash advance allows you to borrow capital for your business against card payments to help your cash flow. Repayments are an affordable percentage of your daily card takings, so you only repay when you get paid.
Whatever your finance needs, our experts have a solution for you. Contact us today to find out more about crowdfunding and all the other options that are available to you.