Crowdfunding explained

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.

How crowdfunding can help your business

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.

Launching a campaign

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:

• They tell a compelling story and convey passion for an idea, connecting like-minded people who share your vision and enthusiasm.
• They offer backers high level, time-limited rewards that can include the product or service.
• They use every means available to sell a great pitch, including detailed business plans, product images and video demonstrations.

Increase your chance of crowdfunding

Like any financial option, crowdfunding has its drawbacks so try to:

• Address any difficulties with complex projects. Crowdfunding works best when the business idea is simple enough for everyone to understand, not just professional investors. Make complicated or technical ideas appeal to crowd funders with a detailed business plan.
• Ask for realistic capital funding. With very rare exceptions, crowdfunding targets are usually around $100,000 or less.
• Stick to what you’ve said. Once you receive the funding you need, don’t make drastic changes to your business. Similarly, stick to your timelines to enhance your reputation and your brand.
• Realize it’s usually easier with consumer products, where people can more easily understand what they’re investing in. It can be harder to access crowdfunding for business-to-business products or services. The general public may not have the industry or market knowledge to invest in that space.

 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.

Summary

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).