As a startup, you may reach a point where bootstrapping can't take you any further and you need to start looking for external finance to grow your business. But what type of finance should you choose; bank loans, angel investment, venture capital...or do you crowdfund?
Although the term 'crowdfunding' has only been around for the last 10 years the industry has grown massively and was estimated to be worth $34.4 billion last year. To put things into perspective, the Venture Capital industry is worth on average $30 billion each year.
So what is crowdfunding?
In simple terms, crowdfunding is the act of raising capital through a large number of individuals via an online platform. To give an example, you can either try and raise £100,000 through a single VC investor or you can use crowdfunding to ask 100,000 people for £1 each.
There's a big misconception around crowdfunding as a whole with many people associating Kickstarter as the sole crowdfunding platform. In reality, there are four recognised models of crowdfunding with hundreds of different platforms each catering for different types of projects.
Donation: Charities and religious institutions have been using this model for centuries and platforms such as GoFundMe and JustGiving have simply made it accessible online. Typically this form of crowdfunding is suitable for community projects, charities, political campaigns and social causes, where the receiver does not expect anything in return for their donation.
Debt: This form of crowdfunding is normally used by established companies who have a clear financial track record. Businesses ask 'the crowd' for a loan and earn attractive returns on their investment.
Equity: The easiest way of describing equity crowdfunding is to think of BBC's dragons den, with the difference being you get a whole crowd of dragons! The process is managed online and you don't need to be a multi-millionaire to invest. Like debt-based crowdfunding, equity is more suited to established companies who are looking to raise large amounts. Essentially, individuals invest into the company and receive equity.
Reward: Reward-based crowdfunding is renowned for its popularity and versatility with campaigns ranging from community projects to tech products. Unlike Debt or Equity, reward-based platforms do not require a business plan or any previous financial records which allow almost anyone to launch a campaign. Typically, this form of crowdfunding works best for B2C companies and in return for their donation, backers receive a tangible reward or experience which is usually related to the project.
Crowdfunding can provide the perfect way for entrepreneurs to not only raise capital but also to validate their idea, providing them with invaluable customer insights and marketing opportunities. Crowdfunding has enabled thousands of ideas to get off the ground which otherwise would never have been possible.
Although crowdfunding has many benefits - speak to anyone who's launched their own campaign and they'll tell you it's not an easy task. Between 60-75% of all reward-based campaigns fail to reach their targets and on many platforms if you don't reach your target you don't receive any of the funds you've raised. That being said, I would always recommend the using an all-or-nothing model as there's more of an urgency that you don't otherwise have with a flexible funding model.
The key things you need to think about before launching a reward-based campaign are:
Who is your crowd?
As much as you'd like to think that everyone in the world will support your campaign, the reality is, not everyone will be interested. You need to think about who your project affects and how many of those will be willing to support you. For example, if you were launching a new iPhone 6 phone case, you won't get much luck speaking to Android users! It's better to ask yourself this question now than go through the whole process and find out the hard way.
How will you incentivise your crowd?
Once you've established who you're targeting you need to think about what to offer. For product based business this is normally quite straightforward, however if you don't fit into this category you need to think creatively. Filmmakers, for example, will often give the backers the opportunity to be part of the film in some way or give away exclusive copies. If you're really not sure what to offer, don't be afraid to ask your target market in advance.
How will you reach your crowd?
Finally and most importantly, you need to think about how you're going to spread the word of your campaign. It can be tempting to take the scattergun approach, however, what you need to think about is where your target market hangs out, offline and online, and focus your marketing efforts.
Crowdfunding is changing the way businesses raise capital and because of the different models and range of platforms, almost anything can be funded. However, like setting up a new business, it will take time and effort, but if executed correctly, you'll reap the benefits far beyond the funding.
Blog post by Rob Wilson, co-founder and Managing Director of CrowdReach