Capital doesn’t come easily to small enterprises these days. Without a doubt, the current business-funding environment is in need of revision. One such revision is the growing industry of crowdfunding. This involves a platform, an individual or entity in need of funding, And of course a community of people willing to collectively contribute the required funds in exchange for rewards and recognition. Crowdfunding makes sense for getting projects off the ground.
Crowdfunding is the practice of funding a project or venture by raising financial contributions from a large number of people. Today it is most often initiated via internet-mediated crowdfunding platforms. However, the concept can also be executed through more traditional methods involving a number of people contributing to a project. These people and organisations are usually called donors, contributors, funders or backers. Contributions are usually small around $5 to $200. but much larger contributions can be forthcoming for worthwhile projects.
According to WordSpy.com, a website that tracks new words and phrases as they enter the language. The earliest recorded use of the word “crowdfunding” was by Michael Sullivan in August 2006. Crowdfunding as a concept pre-dates the internet. Projects such as the Statue of Liberty in the USA which is an example of a large project raising funds from a large number of donors.
Crowdfunding is relatively new concept for small enterprises
Crowdfunding is a relatively new and an effective method of financing you might consider when starting or expanding your business. Like a charity, crowdfunding relies on people to donate money and share networks and resources to support a particular project. In return for their support, they are offered incentives.
This is especially so for businesses that are focused on lifestyle improvements, environmental issues or developing new technologies. You can use crowdfunding to access capital, support, exposure and ultimately you can create a customer base.
Crowdfunded projects may include creative works, products, non-profit organisations, supporting entrepreneurship, businesses, or donations for a specific purpose. (e.g., to pay for a medical procedure). Crowdfunding usually takes place via an online portal, or platform, that handles the financial transactions involved. They may also provide services such as media hosting, social networking, and facilitate contact with contributors.
There are fewer barriers to entry and a greater opportunity to take risks on new ideas. Creators from diverse backgrounds, at every level of experience from across the creative universe, can find backing for their ideas, through financing initiative. For some start-ups, crowdfunding can be a source of funding to get an idea off the ground.
It’s important to protect your idea or product before you make it public
Protecting your intellectual property (IP) is critical when establishing your presence in the market. Making the investment into your IP before launching a crowdfunding campaign could be the difference between success and failure.
There are many small businesses that can benefit from crowdfunding. However, being successful in crowdfunding is not as easy as it seems. It comes with a lot of effort and dedication. However, if you put in the necessary work, you can realise opportunities and ideas that go far beyond just the raising of money.
There are in excess of 450 crowdfunding platforms across the world. Project creators need to exercise their own due diligence in order to understand which platform is the best to use. This will depend on the type of project that they want to launch. There are fundamental differences in the services provided by many crowdfunding platforms.
Relational mediators act as an intermediary between supply and demand. They replace traditional intermediaries (such as grant organisers, publishers and venture capitalists). These platforms link new artists, designers, project initiators with committed supporters. Supporters who believe in the people behind the projects strongly enough to provide monetary support.
Further information about crowdfunding platforms: Comparison of crowd funding services. A search of these platforms will reveal many ideas about successful campaigns and how people go about it.
Crowdfunding has a simple format to get started
Look at today’s market as a global market and crowdfunding as the best way to obtain global exposure. In this regard, I don’t think it matters what platform you use, it’s about what story you tell and who you tell it to. If you focus your campaign to serve the global market and offer worldwide shipping, you can gauge what countries are interested and adjust your IP strategy to match.
- Prepare a business plan explaining what you are trying to achieve.
- Using a platform’s simple to use software and templates start documenting your campaign.
- Start promoting your project using your website and social media.
- When the campaign ends, collect the funds (minus a small service fee of 3% to 5% of the funds generated.
Generally, you post your business idea as a ‘campaign idea’ onto the website, with a description of your project. If people want to support your campaign, they can donate money to help you achieve your goal. These supporters are often called backers. On some websites, you need to set a monetary goal, and a time frame to reach this goal by.
To encourage people to support your campaign, you can offer incentives and rewards based on the amount they donate. These incentives and rewards can be anything, such as merchandise, acknowledgement, discounts on future purchase of the product you are developing. For example, for every donation of $10, you will provide an acknowledgement to the donor on your product’s website. For every donation of $20, you will reward a 5% discount on the purchase of your product once it is produced.
Proof of concept is important
The first question that any ‘angel’ or ‘institutional’ investor will ask is often along the lines of “what is your proof-of-concept”. A good way to gain some credibility is to be able to show that your venture had a successful crowdfunding campaign.
Showing investors and convincing yourself that your venture has received sufficient market validation at an early stage is hard. Crowdfunding makes this possible. Successful crowdfunding shows trust and integrity towards a venture and will allow verification throughout the journey that you are on the right track.
Advantages and disadvantages
Advantages of crowdfunding
The advantages of crowdfunding over other funding sources can include:
- Instead of providing a share to investors, you still own your business in full.
- It’s not always about the money, resources in time and kind may be contributed.
- A customer base who are already committed to your product or service.
- Early validation of your business, project, or both.
- The opportunity for you to interact directly with your customers, who are also your donors.
- The opportunity to get feedback from your customers while your product is being developed and tested.
- Free word-of-mouth marketing for your product through your backers.
- Lower commitment and risk (if you don’t reach your goal, you don’t have to commit).
- Applications for crowdfunding are considerably easier than traditional funding applications.
Disadvantages of crowdfunding
As with all financing options, crowdfunding also has disadvantages, including:
- You need to solve real problems that will capture people’s interest.
- No guarantee that you will reach your funding goal in the set time.
- The need to campaign and present your product well to encourage people to fund it.
- The need to spend time interacting with your donors and providing them with updates on your product and business development.
- Providing incentives and rewards to your donors to encourage donations.
- The need to deliver the product that has been promised to your donors.
- Having to compete with other businesses seeking to crowdfund for their ideas and products.
- Due diligence is too expensive so you will need to overcome the need for it with small donations.
- Investment complexity can preclude standardisation.
- Crowdfunding cannot be relied upon to provide all the capital you need
- You can’t circumvent putting in real effort, you have to do your homework.
Planning is an important part of crowdfunding
Crowdfunding of capital for start-ups is one of a handful of funding initiatives capable of harnessing ‘people-to-people power’ and the ‘wisdom of crowds’ and the ability to access capital for ideas in order to make things happen. It can be cheap money and certainly, it can bypass the hassles with traditional banks and other sources of capital.
Since you are trying to show people why they should support your idea, you need to clearly show them:
- What the product is and what it does.
- Why they should fund your particular product.
- The timeframe for developing your product if your funding goals are reached.
- The incentives and rewards you will give them for funding your product.
- How much funding you need and the timeframe for your funding.
- The benefits and how you will react with the donors.
It is important to manage donor expectations, as many of them will want to track your progress. Some crowdfunding websites will not let you post your campaign unless you have a set funding goal and timeframe.
Don’t just sit there. plan to have a go at crowdfunding.
Managing an active crowdfunding campaign is an intense process and without good planning, it could turn sour and waste a lot of your time and other resources. The practice of crowdsourcing has become more available for bigger projects with a range of platforms being launched to connect investors with ideas.
Crowdfunding has become a very well accepted way of globally launching new products and taking pre-orders of a product. It is expected that crowdfunding will continue expanding and it is a great way to get a business off the ground or test new product ideas.
- Initially, focus on smaller projects because they are usually the most successful with a campaign duration of 30 – 60 days.
- What’s your story and is it credible?
- If you have a large project, break it down into a number of smaller projects, or stages so it is easier to handle.
- It helps if your supporters and friends can contribute say 20% of the funds required since this can kick-start the project.
- Think globally because people from all around the world can contribute to your campaign.
- You must put effort and imagination into creating unique incentives and rewards because it will improve your outcome.
- You are competing for public attention against thousands of other campaigns so make you approach professionally.
- If you do not reach your financial goal in your set time frame no money or rewards can be transferred.
You may need to register for certain licenses or meet certain legal criteria, environmental conditions and local government regulations. This will depend on the type of business idea you are raising funds for, along with the type of rewards or incentives you intend to give your donors.
Make your campaign as simple as possible for the donors to respond. That means all someone has to do is click one or two buttons. Don’t make it any more complicated than need be. Of course, don’t forget to follow up with a thank you.
Protecting your ideas
As with all crowdfunding platforms, it is difficult to protect your idea. It can be difficult providing the community and your network with enough information about the idea you want them to contribute to.
You can explore intellectual property protection (such as patents and copyright) and/or ensure your idea is executed quickly giving you a first-mover advantage. You should speak to an Intellectual Property specialist. http://www.ipaustralia.gov.au/. This is a good place to start if you are concerned about protecting your product, idea or brand.
“To improve chances of success, you want to build a project or product where you think you’re filling a hole. Part of the trick is showing people things that they either a) haven’t seen in a long time or b) things they haven’t seen before”. Scott Steinberg
“Shoot for the moon, even if you miss you will land among the stars”. Les Brown