Crowdfunding // Great Funding Option for Startups

Seed capital for start-up businesses is becoming increasingly challenging to locate. Most entrepreneurs are beginning to search into crowdfunding platforms to raise funds for their start-ups.

The crowdfunding collective is amazing in how it works. There is money to be made in the investment, but the idea that people networking and pooling their resources, typically through the web is astonishing. 

Typically initiated by other organizations or people, crowdfunding is utilized in support of a broad array of activities, which include citizen journalism, disaster relief, political campaigns, support of artists by fans, start-up funding, free software or movie development, as well as scientific research. 

However, apart from social causes, crowdfunding has also become a popular source of raising money for startups over the last few years.

On the global front, the success of crowdfunded startups such as Oculus and Glowforge made people sit up and take notice of crowdfunding not merely as a means to support social causes but also to bring alive the dreams of startup founders that are hoping to solve important problems for a diverse set of customers. 

Crowdfunding is broadly divided into two categories: community crowdfunding and crowdfunding for financial return. 

While community crowdfunding comprises donation crowdfunding and reward crowdfunding, crowdfunding for financial return comprises peer-to-peer lending (P2P lending) and equity crowdfunding.

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While community crowdfunding does not look at any tangible return on the investment made, both P2P lending and equity crowdfunding give investors an option for tangible returns.

In P2P lending, the crowdfunding platform matches the lenders/investors with borrowers. The investors provide the borrowers with unsecured loans at an interest rate set by the platform. 

One of the biggest challenges surrounding crowdfunding is fraud, hence in most African countries, Crowdfunding is still under the rocks and has not been explored much.

However in countries like India, the RBI governs this entire mechanism to prevent possible fraud and ensure that all compliances are met.

In equity crowdfunding, the investor gets allotted equity shares of the investee company in return for the investment.

The Inception

The first recorded successful instance of crowdfunding occurred in 1997, when a British rock band funded their reunion tour through online donations from fans.

Inspired by this innovative method of financing, ArtistShare became the first dedicated crowdfunding platform in 2000. Shortly thereafter, more crowdfunding platforms began to emerge, and the crowdfunding industry has grown consistently each year.

Crowdfunding Statistics

According to the latest study by Absolute Reports dubbed, “Crowdfunding Market 2022,”  the global Crowdfunding market size is said to be worth USD 13340 million in 2021. The global Crowdfunding market size will reach USD 28800 million in 2028, growing at a CAGR of 11.6% over the analysis period.

Bolstered by such promising data, startups entrepreneurs world over are now looking at crowdfunding: both P2P lending and equity crowdfunding as options for their startups to be funded with. 

At the same time, equity funding gives investors on crowdfunding platforms a unique opportunity to not only invest their money for a healthy expected return but also end up owning a chunk of someone else’s business in the process.

As part of equity crowdfunding, investors receive equity shares of the company in proportion to the money invested. They also receive a share of the profit as dividend. 

Though these rewards can be really high if the company that one invests in goes public or there is an exit to another large incoming investor, there’s no guarantee a new startup will succeed, and it may be years before the startup goes public, or a large investor steps in and the investors finally get to sell their shares. If the company fails, the equity shares are rendered worthless.

The Major Players in the Crowdfunding Market remain to be Kickstarter, Indiegogo, GoFundMe, Fundable, Crowdcube, GoGetFunding, Patreon, Crowdfunder, CircleUp, AngelList, DonorsChoose, Crowdfunder UK, FundRazr, Companisto, Campfire, Milaap, Crowdo, CrowdPlus, Idianchou,  Alibaba, Jingdong and Suning

Crowdfunding as an investment option has also caught the fancy of startups the world over due to factors ranging from the obvious ROI to the more subtle ‘positioning’ angle.

Crowdfunding Pros

Little to No Financial Risk

The great thing about crowdfunding is that there’s little jeopardy for the business in launching crowdfunding. It’s possible to test the market and gauge reactions before spending money on costly inventory, materials, and development.

This approach certainly beats funding an unproven business idea through bootstrapping, for instance. In this way, crowdfunding can act as a strong litmus test for the profitability of your business idea. 

If you successfully crowdfund the development of a project, it shows that there’s likely to be sufficient interest to make your startup a profitable venture. 

Whereas, if you fail to gauge sufficient interest, it may be that you should revise your offering or marketing strategy – otherwise you may fail to reach your target audience in the way you had hoped. 

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Access to Cheap Money

Using rewards-based crowdfunding can help you to generate money for your business without costing you equity in your company like in the case with venture capital investments. Essentially, these are donations, and depending on the popularity of your project it may be possible to win the interest of thousands of investors. 

As the rewards you list for rewards-based crowdfunding can be largely cost-effective to deliver. This means you can generate greater sums of investment from crowd funders who are willing to spend more for the types of rewards that they find desirable. 

Centralized Communication

One of the biggest advantages to hosting your own fundraising event on a crowdfunding portal is that you have the ability to focus all of your investor discussion into a single place. 

Prior to funding portals, you had to continually update a bunch of potential investors through emails, meetings and phone calls which can be a highly difficult responsibility to keep on top of. 

Centralising your communications in this way helps you to not only regularly update your stakeholders but to also continually update your fundraising profile so that every new detail can be shared by your prospective investors to better inform their decision and bring more confidence in your startup. 

Finding Your Target Market

One of the biggest existing challenges with more traditional ways of raising startup capital stems from finding and connecting with your investors.

If you don’t already have a strong database and great relationships built up, this process can take a lot of time. 

To leverage this, you could go back to business school for a couple of years and establish a network, or you can go out to every event you can find to develop a network over time. 

You could even attempt to apply for a startup accelerator program. You may be able to tap up your friends and family or access the help of a fundraising consultant who already has the connections and relationships that you need. 

Choose From a Selection of Platforms

As with many things in life, the higher the demand there is for something, the higher the subsequent supply. This means that many crowdfunding platforms have branched out to specialise in specific niches. 

This means that you may be able to utilise these niches to list your crowdfunding online in a place that’s more likely to feature users who are more inclined to part with their cash to fund the growth of a business they care about. 

Be sure to do your homework on the many platforms out there that support crowdfunding and the various niche-oriented off-shoots that they support. In reaching your target audience faster, you can fast track your fundraising process. 

Crowdfunding Best Practices

1) Know who you are working with: As a founder, you should do your homework on who you raise money from both online and offline. Look at their track record and reputation of the platform. Get a clear sense of what the process looks like. Talk to founders who they have worked with before. Understand how the platform can add value.

2) Be Ready: Because you’re raising capital online, traction and growth serve as important signals. Having strong customer testimonials helps, as does compile any news or major press hits that you’ve landed.

3) Clarity is king: You need to be crystal clear about what your product or service does and how it works. When an investor sees a lot of buzzwords being used, it becomes difficult to understand. That makes it hard to make an investment decision. It’s your job as an entrepreneur to clearly communicate your business and its value proposition in a way that investors can understand easily and quickly

4) Cover the key points: The information you post should be no different than what an offline investor would look for. Hit the main points: What is the idea? How does the product or service work? Who’s on the team? What key milestones have you hit? What are your metrics for success? What is the market size potential? What are the investment terms? How big is the round you’re trying to raise? Ideally, have a pitch deck that works without you being there to explain it.

5) Set up a strong feedback loop: The best way you can calibrate customer expectations throughout a rewards-based crowd-funding process is by continually talking to them, actively soliciting their feedback, and building it into your business as you go.

6) Keep running your company: Entrepreneurs can’t afford to put things on hold when a large online audience is waiting for their reward. You have to keep your eye on the things that matter. Ensure that you are getting the right team in place,  right operations & infrastructure to support what you’ll need to do

7) Set a price point: Because rewards-based crowdfunding backers behave so much like normal customers, it’s vital that you hone in on a price point that both resonates with consumers and works for you.

8) Do your recon: If you’re going to go down the rewards-based crowd route, it can be very helpful to speak with other founders who have done it before. They can tell you what to expect both on the cadence of communication with customers, as well as how to actually execute your plan. You can avoid the mistakes they made and capitalize on what went well for them.” Knowledge sharing with founders can make a big difference for you.

Is Crowdfunding Right For your Startup?

There are vast and varied pros and cons for crowdfunding, but hopefully, the implications of this approach to fundraising has helped you to develop a clearer idea as to whether crowdfunding will suit your startup.

Here, it’s vital to consider the amount of capital you need, the time frames that may be involved between you launching your campaign and accessing your funding, whether you have a USP that can help to get your crowdfunder noticed and if you have the time and resources needed to launch a successful campaign whilst generating an appropriate level of awareness. 

In understanding these considerations, you’ll likely understand whether your startup is in a position to seek funding from the crowds of prospective investors out there.

In a sea of businesses vying for attention, be sure to capture the imagination and win the attention of your target audience – then your project will be well on its way to success