In the past, individuals who want to start a business without the necessary funding must undergo rigorous screening for loan approval. If they are lucky, they get funding. If not, they just have to try again. Some resort to borrowing money from friends and family. However, sometimes, the option is not even available for some. Fortunately for them, crowdfunding happened.
What is Crowdfunding and How Does it Work?
Crowdfunding, in simple terms, is the use of capital coming from different individuals to finance business ventures. The method gained popularity recently thanks to the easy accessibility to a large volume of possible contributors through social media and crowdfunding websites.
The use of crowdfunding as a means to provide capitalisation for entrepreneurs has produced substantial results. They provided a venue for business owners to raise thousands or millions of dollars from various people who have money to invest. Similarly, it also provided those who have little money to invest in noteworthy projects or businesses.
The popularity of crowdfunding forced some states to issue restrictions on potential investors who can fund new business and on the amount they can contribute to a particular project. The regulations were put in place to protect regular investors from putting a large part of their savings for a business or project. The regulations assume that there is a high possibility for a project to fail.
What Are the Examples of Crowdfunding?
Crowdfunding has four main types: Rewards-Based, Donation-Based, Equity, and Loan-Based Crowdfunding.
This type of crowdfunding comprises of individuals willing to provide funding for your business to get a reward in exchange. The rewards can vary depending on the market or project. It could be a product or service the company offers. Although backers get a bonus, it is not an equity crowdfunding since they do not get any monetary or equity return. Call Me Diana is one example of such crowdfunding, in which backers would get merchandise in exchange for their contributions. It is often the crowdfunding of choice of most fund seekers because it allows them to incentivise backers without causing extra expense on their part.
Donations-based crowdfunding is also a popular choice for fund seekers. Crowdfunding is not only a practice for business owners looking for additional funding. It can also be used by individuals who are looking for additional funding for medical bills, procedures, disaster relief, non-profits, charities, and just about anything. Since these are donations, backers cannot expect any return from their contributions.
This type of crowdfunding is the most popular among investors because, unlike rewards-based and donation-based methods, backers get financial returns. They become part-owners of the company. Trading capital becomes equity shares, and backers can expect dividends or a percentage of the profits.
Loan-based crowdfunding method works by making backers lend money to individuals or companies. In exchange, they get a set interest rate. It is also known as peer-to-peer (P2P) or peer-to-business (P2B). Despite offering financial backing, loan-based crowdfunding contributors do not own part of the company. They are similar to loans, where debtors have to pay interest until they pay back what they owe.
What Are the Benefits of Crowdfunding?
Aside from gaining access to thousands of investors and opening flexible capitalisation options, crowdfunding still has tons of benefits over conventional methods. Some of the benefits include:
Fund seekers can tap into a wider pool of investors whom they can interact with and present their fundraising campaign. The campaign opens up a lot of opportunities for fund seekers to market their products and services should they become successful.
Creating a crowdfunding campaign is not easy. You have to take into consideration a lot of factors. Through crowdfunding, you get to polish your presentation skills. Remember, crowdfunding sites are riddled with high-profile investors who might take an interest in what you have to offer. That said, you have to present your company or product’s history, value proposition and offerings that will make CEOs see its intrinsic value worthy of their investment.
Training for PR & Marketing
The marketing of your potential product begins from the time you start your campaign. Remember that crowdfunding is a common practice nowadays, so there are tons of projects out there that you have to compete against. How would you make your business or project stand out? It all boils down to your marketing campaign. As much as possible, you want your project to be seen. You can do it through exploiting social media, sending emails, newsletters, and online marketing techniques.
When you put your product out there, you have to prepare yourself for feedback. This feedback can be positive or negative. Use this to refine your offering. When potential backers begin to ask questions, it will be easier for you to assess your product and add anything that’s still missing. Refining your offering will make it stand out, allowing you to get more contributors.
Online crowdfunding allows fund seekers to streamline all fundraising efforts. Through the use of a single platform, it will be easier to funnel all potential investors, and there will be no need for you to pursue them individually. Through this streamlined process, you can direct most of your efforts toward improving your business rather than focusing your energy on fundraising.
Take Note of the Rules
When you are new to using crowdfunding platforms, you have to check their rules and regulations, so you don’t get banned.
Kickstarter, for one, does not allow any equity crowdfunding in their site. Additionally, campaigns must not include any of their prohibited items such as energy food or drinks.
Before launching a campaign, it is highly advisable to read through the rules of each platform. This way, you can also use the one that is more congruent with your needs.
Crowdfunding is a great innovation that brings together investors and business owners. It bridges the gap and allows better and more streamlined processes. Crowdfunding platforms also provides accountability for both investors fund seekers, so there is no need to run after each one when the need arises.