Until recently, raising funds for a new venture-a company or a project wasn’t easy, and the process was infested with limited funding options. Funding options were limited to drowning one in debt by taking out a loan from a bank, drying up one’s saving account, drafting and sending proposals to potential investors, or, relying on the family to fund your dreams. However, the 21st century popularized another funding method: crowdfunding.
What is Crowdfunding?
As the name suggests, crowdfunding is a mechanism that allows money to be raised by many people for multiple uses. Many people pool their money into a cause, an idea, or a project to provide it the financial head start that it requires to become self-sufficient. Crowdfunding can be done privately-by an individual-or it can be a public call to raise funds by the government.
Just to keep the concept simple, let’s draw a line of distinction for better understanding. Small businesses and digital agencies like Buzz Interactive are not aided with crowdfunds. However, big companies (especially tech-based) like Tesla receive crowdfunding as a way of scaling and strengthening their foundation.
Securities-based crowdfunding allows people to invest in companies (start-ups). The securities-based crowdfunding allows investors to receive dividends (profits) from the stock, a chance to invest in shares or any other financial security issued by the company.
Donation-based crowdfunding takes place when someone asks for donations to fund their cause or dream. GoFundMe is one of the most popular platforms for donation-based crowdfunding. People who are in dire need of money for a cause (to finance their education or pay their health bills, for instance) often resort to donation-based funding. It is understood that the money given in donation-based crowdfunding doesn’t have to be paid back.
In reward-based funding, people donate to support and eventually unlock a reward. For instance, many companies give people an incentive to invest in their product, which, after launched, is given as a reward.
This is a popular funding option that allows people to obtain funds directly from their friends and family without involving a third-party (a financial institution). Peer-to-peer crowdfunding is based on the goodwill and trust of family members on each other.
Real estate crowdfunding
Real estate crowdfunding allows people to invest in property and real estate projects. It is useful for individuals who wish to build a strong real estate portfolio, but would rather not deal with commercial or investment banks, or real estate brokers.
Human capital crowdfunding
Human capital crowdfunding is a mechanism for people to raise money to support their growth or projects. Investors can fund a project in lieu of a share of the winnings. For instance, starting a business together and then distributing the profit among the investors.
How Does Crowdfunding Work?
Crowdfunding works differently in different cases; for instance, companies (start-ups) have different fundraising mechanisms than individuals who wish to finance their dreams.
However, to an extent, the process is similar.
In the case of an individual If an individual wish to raise money by crowdfunding, he or she needs to be weary of the following factors:
The aim of the funding
If the funds are needed for personal reasons (financing hopes, ambitions, dreams, and aspirations), they have two options: donation-based crowdfunding and peer-to-peer crowdfunding.
Straighten-up Your Finances
When asking for funds, you (most often) find yourself in two situations: you either have no money or are facing a shortfall of it.
The Crowdfunding Process
Nonetheless, in both instances, you need the cash flow. In both situations, it’s best if you undergo the following process:
- Calculate how much money you need. It’s best to ask for more money than you need since the operational costs can ooze from many places when you start a business.
- Identify the type of (mentioned above) crowdfunding you wish to indulge in.
- Design and draft a business or a project proposal. Even if you’re asking money from your loved ones, you should draft a business or project proposal so that the investors take you and your hopes seriously. Your goal to raise funds for a non-existent project that has more chances of failing than being a success; therefore, to get your investors to trust you, you need to look and act professionally from the beginning. Your business proposal should (ideally) have your work model, product details, and the (possible) edge it has over its competitors.
- If you’re going for donation-based crowdfunding, instead of drafting a proposal, pen a story that humanizes your life struggles and emphasizes your need to raise money from crowdfunding. For example, suppose you’re starting college and don’t have the money to finance (partially or fully) your education. In that case, it’s best to talk about your academic success, the personal struggles you faced when growing up, and how you overcame them. Most importantly, focus on the efforts that you’ve undertaken to finance your education and why you still need more money.
In the Case of Companies
As mentioned before, crowdfunding for companies is a little different than it is for an individual.
However, thanks to technology, crowdfunding is just-a-click-away. Online platforms like Kickstart and Indiegogo connect investors with potential companies that need money; they offer investors a variety of packages and incentive(s) to invest in their venture. If the enterprise earns profits, the investors get his or her share.
Benefits of Crowdfunding
Crowdfunding has its reasonable share of benefits, a few of which are:
- Crowdfunding is a (relatively) uncomplicated way to raise money without any associated costs.
- It serves as an unconventional and a nontraditional way to gather funds for your venture, knocking family’s and relative’s doors often come with strings.
- Banks (commercial or investment) are often reluctant to fund start-ups because of the financial risks they pose.
- Eventually, crowdfunding may serve as a marketing tool. Since you’re investing time and effort in raising funds for your project, therefore, when you launch it, you won’t have to go the extra mile to bring in customers. There is a chance that the investors might advertise the product for you since their money is at stake, and they would like the business to be profitable.
Disadvantages of Crowdfunding
Like everything else on this planet, crowdfunding has its disadvantages too.
ü You should not take crowdfunding too easy, like every other funding mechanism, it has its fair share of problems. While you wouldn’t have to undergo a tedious legal process, due to rising competition in the start-up industry, you should be aware that there’s a strong probability that you may not get a place on a crowdfunding platform.
ü You have a time-limit to raise your funds. If you are unable to raise funds during the allotted time, all the collected money will be returned to the investors.
You will have to go the extra mile to win your investor’s trust, which is often not the case with commercial lending.
ü Setting-up a profile on a crowdfunding platform is tedious, costly and will require substantial man-hours. If you’re committed to your work, only then leap.
Since investors will finance most of your venture, you may have to give away (a little) too much to your investors. You may not have the autonomy over your business than you initially expected.
How to Make Your Crowdfunding a Success?
In crowdfunding, you must be able to raise the required funds on time. However, it becomes impossible to do so when you don’t play your cards right. Therefore, keep the following tips in mind when starting your crowdfunding campaign.
Always keep your goal in mind
The goal could be the aim or the image you want to your enterprise when you have an objective, its challenging to go astray.
Work with like-minded people
There’s an old saying, and it takes teamwork to make a dream work. As a budding entrepreneur, you should be mindful of this saying. Work with a creative and hardworking team that understands your vision and collaborates with you to build your dream(s).
Ensure that your product is unique
There’s nothing new under the sun, but that should not stop you from innovating and finding a creative or technical edge over your competitors. A unique idea or feature can go a long way; it acts as an investor puller and is a testament to the fact that you take your venture seriously and that you have something new to offer that your competitors don’t.
Research and Research…
We cannot emphasize on this point enough before you delve into something, it’s best if you know something -if not anything about it. Therefore, it’s best if you conduct in-depth research on your potential market. You should be aware of your product niche, competitors, market price, market leaders, etc. Any little information is of significant use here.
Use Social Media To Your Advantage
Social media is an excellent tool for connecting people; you can notch it up by using it to fund your venture. Share your crowdfunding page on your social media profiles and ask your friends to do the same. The more visibility of your page, the more likely you’re to get funding.
In the end, don’t lose hope and keep striving.