Are you an entrepreneur with a promising business idea and now looking for ways to raise capital for your business? In the following article, you will learn everything you need to know about crowdfunding.
What is crowdfunding?
Crowdfunding is a way of raising money from a group of investors in order to obtain capital for a business. Investors are largely those who are interested in the business idea: they can be fans and enthusiasts, friends, acquaintances, family members, but also individual investors and investment groups.
The goal of crowdfunding is to attract a large group of investors so that the project can obtain the capital needed to implement the business plan. it usually takes place online through dedicated platforms such as Invester, Kickstarter, Upvest, or HitHit.
Crowdfunding can take many forms, including:
donation-based: In this type of crowdfunding, the funds raised are donations, so the recipient is not required to repay the funds. This type of fundraising is usually more focused on charitable and non-profit organizations. Friends and family members are unlikely to expect a return on their investment.
investment: In this type of crowdfunding, participants receive a financial reward for their investment in the form of company shares.
What are the advantages and disadvantages?
Raising capital through crowdfunding has its pros and cons. Let’s first look at the positive aspects of crowdfunding.
Advantages
- Low financial risk
- Increased brand and company awareness
- Form of marketing and advertising
- Opportunity to test the market before launch
- Control over your own capital
Disadvantages
Before launching a crowdfunding project, the following disadvantages should be considered:
- Crowdfunding requires a lot of time and effort
- The problem of market saturation
- Many crowdfunded projects make little or no profit
- Fraud is common
Note: If a company does not reach its funding goals, the crowdfunding platform will usually return the money to donors, although some sites allow them to keep the funds raised for a fee. Entrepreneurs should also be aware of any processing and hosting costs.
Online crowdfunding platforms
There are many online crowdfunding platforms that can be used to start a business. In addition to foreign online crowdfunding platforms such as GoFundMe, Kickstarter, Indiegogo, and LendingClub.
Below, we will introduce the most popular crowdfunding platforms in more detail. Let’s first take a look at the foreign ones.
GoFundMe
GoFundMe is a donation-based crowdfunding company that is most commonly used for charitable purposes, but companies can also use this platform. This is a great choice for non-profit organizations and businesses that have service-based initiatives. Statistically, 1 in 10 campaigns launched on the website is fully funded.
Kickstarter
Kickstarter is a reward-based crowdfunding platform that has been helping companies raise money since 2009. It has been used to raise more than $5 billion for over 182,000 projects. The Kickstarter platform is particularly successful thanks to its ease of use. You set a financial goal and a time frame in which you want to achieve it. You then share your project with the community in the hope of finding supporters and raising the necessary funds.
Indiegogo
Indiegogo is a reward-based platform that offers two types of funding. Fixed funding allows you to set a goal for a specific amount of money, and if you don’t reach your goal, all funds are returned to donors. Flexible funding can be used if you are looking for any amount of financial support, which you can then keep regardless of whether you reach your financial goal or not.
LendingClub
LendingClub is a crowdfunding lending site, as it is a P2P lending platform. It offers up to $40,000 for personal loans and up to $500,000 for small business financing. The term of each loan is three or five years. To qualify, your company must have been in business for at least one year, the applicant must own at least 20% of the business, and its annual sales must be at least $50,000.
What are the basic rules of crowdfunding?
Most crowdfunding platforms have specific rules. For example, Kickstarter does not allow investment crowdfunding and has a list of prohibited items that you cannot include in your project. Before choosing a platform, it is therefore wise to read these rules thoroughly so that you do not have to stop your campaign before it even starts.
If you ignore the rules and launch your crowdfunding campaign without preparation, the likelihood of success drops sharply. You need to research the various crowdfunding platforms accordingly to find out which platform is best for your project.
What are the challenges of crowdfunding?
Many individuals assume that crowdfunding is an easy or free way to make money, but the truth is that crowdfunding requires a lot of effort to create a project that supporters will perceive as a valuable service. Success is not guaranteed, and as crowdfunding continues to grow in popularity, investors are carefully selecting which projects to support with their finances.
Crowdfunding works for all types of companies at all different stages, but the companies that have the most successful campaigns tend to have the largest and most engaged communities—usually customers or users or other supporters of their mission.
Generating this type of broad support can be a challenge. It requires strong marketing, credible founders, and a quality product or service.
Below are the most common challenges companies face when crowdfunding:
- Finding and implementing a cost-effective marketing strategy before, during, and after a crowdfunding campaign.
- Creating the right message in the campaign description that will spark interest in the product or service.
- Creating an informative and interesting campaign video that explains the product and its benefits (the main problem is that it is expensive to create a really good, high-quality video).
- Creating and planning a rewards program to strategically maximize return on investment.
- Finding the most effective and cost-efficient method of fulfilling rewards.
It is important to note that these challenges are just the beginning of the obstacles that need to be considered when creating a crowdfunding campaign. In addition to the challenges listed above, each campaign creator will have their own challenges that are unique to their business.
Additional challenges also arise from investment crowdfunding, which requires a greater emphasis on educating potential investors who may not necessarily have an investment background.
We are all very accustomed to purchasing products online, so investing in a typical crowdfunding campaign is fairly easy. The key is to explain to interested parties that they are essentially pre-purchasing a product that does not yet exist and will receive it in six to 12 months. This is quite easy to understand. However, for someone who is not actually used to investing in companies, investment crowdfunding may not seem so appealing.
How to ensure a successful crowdfunding campaign?
There is no universal approach to crowdfunding, but here is a link to an article with some advice and tips on how to make your project a success.
What do investors gain from crowdfunding?
Investors can gain a lot by putting their money into crowdfunding campaigns. Investors appreciate low-risk ventures, which crowdfunding enables. Since it is not part of the financial market, investors do not have to worry about the impact of the economy or the stock market on their investments.
One of the main advantages of crowdfunding for investors is the ease of investment. Investing in a crowdfunding campaign is easy. Investors can put money into a project or company through a straightforward online process. Investors can use crowdfunding to diversify their portfolios..
Conclusion
This article was primarily intended for all aspiring entrepreneurs and small business owners who want to learn how crowdfunding can be used to obtain financing for individual projects.
Companies, organizations, or individuals can finance their businesses without traditional means—through small financial donations from a large number of supporters and investors. By obtaining the necessary increase in cash flow, these businesses can get started or launch new projects.
To achieve your funding goal, you need to do more than just launch a crowdfunding campaign for your project. Promote your business idea – whether it’s a product or service – before and during the campaign, and provide updates on the progress of your business to build relationships with your supporters and convince them that your project is a good investment. Planning a crowdfunding campaign from A to Z can also be an ideal topic for a thesis, which you can write under the guidance of our experts as part of your MBA studies, for example in the field of Marketing Management.
