Over the last several years, crowdfunding has become a popular way of raising funds for many businesses, especially among startups who otherwise would not qualify for a loan from a financial institution. It is a method that takes advantage of the influence of social networks.
In the past, founders requested contributions from their family members, friends, and colleagues. Now they can set up an online crowdfunding site to tell their story, upload photos, and accept contributions from different investors.
Crowdfunding by definition is simply is using funds pooled together from a group of investors to finance a business venture. It makes use of social media to access a wide network of individuals, which also helps founders connect with investors. The goal of crowdfunding is to increase entrepreneurship and also investment opportunities by giving both camps a platform that is separate from the traditional way of investing. It is interesting to note that even non-profit organizations look to crowdfunding to raise funds.
Normally, those soliciting funds will set up a profile of their project on a crowdfunding website. They make use of social media marketing to supplement their typical network of family members, friends, and colleagues.
Types of crowdfunding
- Donation / Reward crowdfunding
When people invest, it means they believe in the project. In reward crowdfunding, investees offer rewards like gifts, tickets to events, acknowledgments in a book or on an album, and so on.
In donation crowdfunding, investors invest without expecting anything back. They simply want to feel good about helping other people.
- Debt crowdfunding
In debt crowdfunding, investors lend you money which you are expected to pay back with interest at a given period. Also known as peer-to-peer lending, you can borrow money without going through the strict requirements that banks usually ask for. Investors do not become part owners of your business and instead earn through interest.
- Equity crowdfunding
Using equity crowdfunding, investors finance your business in exchange for equities. They become part owners of your business, meaning you will not have full control of your company. The advantage of equity financing is that you are not obliged to pay your debt in case your business does not do well.
Case for crowdfunding
- The primary advantage of crowdfunding is the ease with which you can get the capital you need to start your business. Sometimes, it is even cheaper than taking a loan from a financial institution.
- There are no strict requirements to meet, unlike when you go to a bank to get a loan. Projects that remained on the drawing board can now get a chance to take off through crowdfunding. It is a great back up finance option if you fail to secure a bank loan.
- You can get publicity for your business just as you are about to start. Crowdfunding projects can generate a lot of headlines, enough to make the public curious about your business and its offerings. At the same time, it can be a nice way to gauge public reaction to your product offering.
- Pitching your projects through any of these online platforms that involve crowdfunding can give you plenty of opportunities to market your product. You can also get expert advice from experienced investors.
Case against crowdfunding
There are downsides to crowdfunding as well. Here are some of the reasons why you should think twice about turning to this option.
- There is a low success ratio as far as getting the funds for a project is concerned. Low, as in only 1% or 2% are funded. So if you want to go the crowdfunding route, you will have to manage your expectations. You should have an airtight business plan to present to investors to improve your chances of success.
- There is a downside to making your pitch in public as well. Somebody else might steal your idea since you are required to reveal what your ideas are. Be sure to protect your idea with the appropriate patents, licenses, or trademarks before presenting it to the public.
- You need to achieve your funding target, otherwise, you will have to return the funds and you will end up with nothing.
The high cost of running a crowdfunding campaign
Crowdfunding, while a means to get financing, does not mean you can join without spending for it. There are costs you should prepare for when launching a crowdfunding campaign.
- Marketing costs
You will have to let everyone know that you have an idea, which means there will be advertising and promotions involved. These will require a budget.
- Platform fees
Crowdfunding platforms normally charge a fee for running your campaign. This is separate from processing fees and can be as high as 7.5%.
- Product designs
Marketing channels and their costs
There is a myriad of crowdfunding marketing channels available to you, and each one with different costs. So you will have to consider your budget when picking a marketing channel.
- Crowdfunding platforms
The most popular among founders to launch a crowdfunding campaign. Kickstarter and Indiegogo are two of the most established platforms. Indiegogo charges a 5% platform fee and a 3%-5% processing fee. Kickstarter charges similar rates.
- Blogs and landing pages
Landing pages and blogs can be effective tools in running your campaign. Costs include payment for websites, domain hosting, graphic designers, and content creators. Here are a few sample costs:
- Website design: $1,000 to $50,000
- Website hosting: $3 to $15
- Domain registration: $10 to $15
- SEO – $2,000 to %10,000
- Content creation – $60 to $300
- Email marketing
Who says email is antiquated? Digital marketers all agree that email is still the most effective marketing method that they use. You can use third-party email marketing services like Mailchimp. Prices range from $0 to $299.
- Social media
Social media marketing targets specific groups of people who are interested in your niche. The cost depends on the number of days, the number of people targeted, and the areas where you want to run your campaign, but can be quite costly depending on who you are targetting.
As you can see, crowdfunding can be advantageous as well as expensive for business owners. Before you decide on crowdfunding for raising capital, you may also consider other forms of financing. Study each one carefully before you decide, as this could determine the ultimate success or failure of your business.