Getting a business off the ground is tough. It’s even tougher when your bank doesn’t share your vision. As an alternative, Crowdfunding has become a popular and viable option for entrepreneurs in gaining capital as well as critical exposure for their fledgling businesses.
Crowdfunding is a financing mechanism that utilises the internet to crowd-source capital from individuals who network and pool money in support of new ventures. The practice has been successfully applied to the likes of start-up funding, charitableorganisations and civic projects, amongst others.
The internet has facilitated the growth of unique dedicated communities around crowdfunding projects and websites, which effectively provide businesses with a platform to connect with the right potential patrons and customer base necessary to kick start projects, have begun to pop up in increasing numbers.
How Does It Work?
Although it can depend on your chosen platform, generally you pitch your idea, set a fundraising target and a deadline for achieving it. Potential contributors can then view your idea and donate capital towards your goal.
It’s worth remembering that on most crowdfunding sites patrons are funders not actual investors, so they won’t hold any stake in the business itself.
To launch your crowdfunding campaign, clearly describe your project, detail the rewards for contributors should fundraising be successful and set an achievable project deadline. If the campaign fails to hit its target on time, no money is provided.
The key to attracting funds for your project is to be distinctive and actively engage the community.
With over 450 platforms available, choosing one all depends on the nature of the venture. Crowdfunding sites include the Irish-based MoneyCrowd, as well as leading platforms such as Kickstarter, Indiegogo and Crowdfunder.
The foremost advantage of crowdfunding is the access to capital that new business can often find difficult to obtain from banks and through other traditional sources. Also, with the incentive of unique, tangible rewards, businesses can better appeal to their potential backers.
Providing rewards in exchange for funds also allows you to keep all of your company’s equity, and as the funding campaign’s duration is relatively short (usually 90 days), it can prompt more productivity in a limited space of time.
Patrons make their pledges via credit card but money won’t be received for the project unless it becomes fully backed during the campaign. This allows new businesses a vital risk-free test period as well as valuable customer feedback on the product, which, in turn, facilitates improvements in the business or product design.
One of crowdfunding’s core problems can be its ‘all or nothing’ nature. Your fundraising target needs to be achievable and realistic, not least because failing to achieve it will leave you without funds but also no personal reward after all of your campaign efforts. While there’s no actual penalty for missing your fundraising goal, there is the hurdle of disappointment at a key early stage of your business.
The risk of publicising your intellectual property is also high on crowdfunding platforms. Having the necessary patents in order is crucial in this respect and if your product is particularly unique, then perhaps it’s best that you steer clear of the crowdfunding route completely.
For seed capital the crowd method is ideal; however, if your project needs considerable funding, more traditional sources would serve you better. Similarly, if your project is likely to have a lengthy development process, it may benefit from alternative funding options. Crowdfunding backers generally want to participate in projects that have relatively concise development periods so they can see and enjoy the results of their contribution.