- Crowdfunding is a more recent, but growing, way Founders are raising capital for their startups.
- There are different types of crowdfunding, which all have their advantages and disadvantages.
- Founders should research the types of crowdfunding available to determine which best align with their goals and the goals of their company.
Crowdfunding has gained in popularity over the last several years and is becoming a common way Founders are funding their startups.
Numerous platforms now exist where Founders vividly describe and showcase their product or idea for a product, highlighting their goals, strategy and capital needs in order to ‘crowdfund’ and receive capital from hundreds and/or thousands of individuals.
Crowdfunding can be split into reward-based crowdfunding, where contributors are given something in return for providing money, donation-based crowdfunding, where money is given with no expectation it will be paid back or anything will be received in return, equity-based crowdfunding, where pieces of the business are given to a group of individual investors in return for capital and debt-based crowdfunding, where capital is borrowed from a group of individuals to be paid back with interest.
Advantages of crowdfunding include;
- It can be a very quick and cost-effective way of raising funds and provides instant access to capital.
- It’s a great way of building a community around a product.
- It can generate large amounts of interest and hype resulting in free publicity.
- It’s an easy way of getting customer feedback.
- It’s particularly suited for niche ideas that might struggle to gain access to a receptive audience or investment.
- It has the potential to attract interest from ‘bigger’ investors such as VCs, acting as a positive signal and providing leverage to negotiate more funding on better terms.
Drawbacks of crowdfunding include;
- It is extremely competitive with many projects applying to crowdfunding platforms being rejected. Of those that do succeed, few reach their target goal.
- If you fail to reach your target, any capital raised typically has to be returned and you are left empty handed.
- If your target is reached but your startup ultimately fails, it can severely damage your reputation.
- Public display of an idea can increase the chance it is copied unless it has a patent, trademark or copyright.
- Crowdfunding campaigns require time and money to set up.
- Most crowdfunds require a strong, established network to succeed.
- Striking the right balance between rewards for investment can be difficult and may result in too much being given away for too little.
Beware of fake crowdfunding sites and copied projects that funnel money to fraudsters. It is important that the credibility of crowdfunding platforms are confirmed before committing to their use.
“Crowdfunding is a brilliant way of enabling businesses to reach out to multiple networks for investment, as well as presenting the business to new audiences. Whilst it is traditionally a lot more accessible than most forms of fundraising, not every business is suited to its format, and the key things that need to be addressed before considering crowdfunding is whether you have started to build a community of followers or customers, and setting an achievable target raise amount relative to the current stage and community of the business. Before launching the round, you should already have some precommitted investment lined up from private investors, such as Angels or VCs, in order to get the crowd excited about your business.”
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