Crowd funding, a multibillion-dollar industry worldwide, goes beyond helping new startup ideas come to life. It continues to disrupt the traditional world of corporate finance, as well as change the way products go to market. The interest in how to use Crowdfunding and equity Crowdfunding effectively is reaching new heights every day. Entrepreneurs just like you are using Crowdfunding for proof of concept, early idea validation and even customer pre-orders. Crowdfunding is not only putting the power of fundraising into the hands of the people, but it’s permanently changing the financial ecosystem. And, this is so powerful!
But, it still has a long way to go. As per the recent surveys, only two percent of business owners worldwide have used a Crowdfunding platform. One of the reasons for not using Crowdfunding is the lack of understanding about how exactly it works.
Crowdfunding usually refers to equity finance, raised online from a pool of investors. Providers that offer this type of finance normally vet the businesses applying and choose business plans that look more promising, to feature on their platform. Investors then have an opportunity to invest for a small chunk of equity, and they diversify their risk by investing in a range of businesses at the same time.
From picking a platform and preparing a campaign to maximize exposure and offering investment incentives, there are many factors involved in launching a B2B Crowdfunding campaign. Any startup considering going this new and alternative route needs to ask itself a few questions in order to be successful.
1. What is your message? The most important aspect of explaining your product isn’t around the benefits, it’s around the problem it solves. Start with the problem, explain your solution and then verify the market size in your pitch to frame the situation for investors.
2. How much do you need? Instead of shooting too high, break down your funding into phases and establish a goal that makes sense within each phase. It sends the right signal to the crowd reviewing your offering.
3. Do you have a list of potential supporters prior to your product launch? Create an atmosphere of success; get interested parties on board before the launch. Assemble a starter crowd to draw attention to your pitch and make investors more interested.
There are four distinct types: reward, donation, equity and lending.
Rewards-Based Reward-Based Crowdfunding allows you to raise donations for a project or endeavor from a large number of people. In return, you need to offer specific rewards, such as a sample of your product, a limited edition or an experience.
Donation-Based People funding donation campaigns don’t seek anything in return. Though businesses can use this type of Crowdfunding, it’s much more common for individuals with an immediate, personal need, or charities supporting worthy causes.
Equity-Based Equity Crowdfunding allows investors to contribute to your funding round, in return for a stake in your success. Looking to the future, equity Crowdfunding may represent the next frontier in Crowdfunding. As the regulatory framework in this area continues to develop, investors will have protections, and companies will be empowered with the means to innovatively raise funds for new projects.
Lending Money raised through lending Crowdfunding is paid back in a set amount of time, with interest.
How Crowdfunding Can Help your Businesses
Crowdfunding is regularly cited as a way of getting direct feedback from the public about how to improve a new or existing idea. This can save a business tens of thousands of dollars by testing for public demand before rolling out a product and providing a proof-of-concept. Businesses also often use a Crowdfunding campaign as a marketing tool. Occasionally, Crowdfunding campaigns go viral and are rapidly shared on social media outlets by millions of users.
After the Campaign
Finally, give back to others who are Crowdfunding, too. Look for opportunities to connect with other companies that are starting up or are growing. As you support other entrepreneurs, you’ll see support coming back your way when you launch round two or three. Additionally, the sense of community built by passionate investors from the beginning of the campaign remains as the funded enterprise grows.