Crowdfunding is when you raise capital from the ‘crowd’, or the general population. It’s usually facilitated by online platforms such as www.kickstarter.com and www.indiegogo.com (ask your industry networks or search online for what may match what you’re doing).
Some businesses find it a great alternative than the normal method of borrowing or seeking capital directly from angel investors, friends and family.
It allows businesses the freedom to raise capital from a range of people: investors, customers, colleagues, peers, even strangers. Like anyone in search of funding, successful campaigns rely on a solid idea and a detailed business plan including financial forecasts and cash flow statements, to convince people it’s worthwhile to support your venture, so it’s not necessarily a short cut to capital.
Typically, the crowdfunding platform promotes your campaign page, with incentives for investors in the form of rewards or equity. A reward might be pre-order of a new product, or services offered in exchange for funding support while equity would be a share of the business offered in exchange for capital.
Crowdfunding can offer a funding alternative for businesses that possibly don’t qualify for a loan, or don’t want to apply for a loan, or you’re possibly at the limit of your borrowing. It may also be because you want to spread the risk of the business across a number of different loan providers. Crowdfunding can also give you exposure to a wide group of people (across the whole country), who may contribute more than just money such as advice, networks and access to resources.
Crowdfunding campaigns can go viral but they’re likely to gain traction because they appeal to the people you already know in your network, as well as investors who are searching for an opportunity in your industry.
Successful business crowdfunding campaigns tend to have these things in common:
Like any financial option, crowdfunding has its drawbacks so try to:
There’s also the question of intellectual property protection. Your IP will end up in the public domain, so you may decide to keep some information back. Funders can then sign a non-disclosure agreement or confidentiality agreement to protect you.
Crowdfunding can be a smart, cost-effective way to get funding for your business. It can also offer an unadvertised side-benefit: priceless feedback from your backers that can help tweak your idea before you move into production, allowing you to launch an even more successful business.
However, keep the challenges in mind. Remember, be crystal clear as to why you are raising funds, why others should support your project and to triple check it’s not easier to fund your growth by conventional methods which leaves you in total control (your own money, reinvesting profit or borrowing).