What is Crowdfunding? Types, Benefits and Tips

Any entrepreneur's ambition is to keep coming up with the million-dollar concept that shuttles them to fame. Even if they do, this plan is usually impracticable owing to a lack of cash and beginning capital. 

 

What is the connection between the Oculus Rift VR headset, The Coolest Cooler, and the Fidget Cube? Answer: They have all been crowdfunding businesses that acquired within $250,000 and $15 million.

 

This section will describe what crowdfunding is, the different types of crowdfunding, the advantages of crowdfunding, and some advice for getting your new business off to a good start.

 

Also Read - Series A, B, C Funding

 

 

What is Crowdfunding?

 

Crowdfunding is the process of increasing awareness about a new product that you're thinking of producing and then collecting modest donations from a large number of interested parties, most of whom are ordinary members of the public. Indiegogo and Kickstarter are popular venues for initiating a crowdfunding campaign.

 

Crowdfunding turns the traditional company finance approach upside down. Instead of obtaining financing from a business or a few capitalists and then selling it to the public, you place the specific product in the hands of consumers. They will invest if they like your idea and marketing. Otherwise, they will not receive your stuff.

 

Also Read - Seed Funding: Types and Advantages

 

 

Types of Crowdfunding

 

We’ve discussed 6 Types of Crowdfunding below : 

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Types of Crowdfunding

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1. Security-based Crowdfunding

 

It gives people the opportunity to participate in private firms (aka, startups). In exchange for funds, shareholders invest the assurance of stock, upcoming shares, or perhaps another security issued by the corporation in this sort of campaign.

 

2. Donation-based Crowdfunding

 

This is when someone makes a donation to a certain cause or charity (like GoFundMe).

 

3. Rewards-based Crowdfunding

 

Crowdfunding based on rewards is exactly how it sounds. People give in order to receive a specific reward associated with the project they support. For example, you may contribute to the development of a new product line and then receive it in return.

 

4. Peer-to-peer lending

 

It enables people to get credit straight from other people, without the need for a bank or other financial institution to serve as a middleman. Consider this to be debt crowdfunding.

 

5. Real-estate based Crowdfunding

 

Individuals can contribute to real estate developments through real estate crowdfunding. This is especially beneficial for those that want to invest in real estate but do not want to interact with financial advisers, real estate brokers, or contractors. This is a subset of securities crowdsourcing.

 

6. Crowdfunding for human capital

 

It is a method for people to generate funds to support their own development or initiatives. In exchange for a portion of the profits, investors are given the option to support a venture. Many professional gamblers, for example, crowdfund money to play and then transfer a portion of their profits to investors.

 

(Also Read - Liquid Funds)

 

 

Benefits of Crowdfunding

 

Crowdfunding has a variety of advantages over traditional techniques, including access to a larger investor pool and more flexible fundraising possibilities. Here are just a handful of the numerous benefits that will be discussed in greater depth later in this guide:

 

1. Reach - By using a crowdfunding campaign like Fundable, you will have access to millions of authorised investors who will be able to see, interact with, and share your fundraising campaign.

 

2. Presentation - By launching a crowdfunding campaign, you go through all the necessary processes of distilling your company's history, traction offers, opportunities for entrepreneurs, pricing structure, and more into a polished, readily consumable package.

 

3. Public relations and marketing — From start to finish, you may share and promote your campaign using social media, email newsletters, and other internet marketing strategies. As both you and other news organizations cover the development of your fundraising, you may boost traffic to your website and other corporate resources.

 

4. Concept Validation - Exposing your idea or business to the audience provides a wonderful chance to validate and develop your offering. As potential investors participate and ask questions, you'll immediately notice whether there's anything lacking that would entice them to invest.

 

5. Efficiency - One of the finest aspects of internet crowdfunding is its ability to consolidate and standardize your fundraising campaign. You remove the need to approach each prospective and possible investor individually by creating a single, detailed summary to which you can route all of your possibilities and venture capitalists.

 

How Does Crowdfunding Work For Companies?

 

Companies like Republic have made it simple for people (or supporters, as they're sometimes referred to) to invest with only a few clicks. Crowdfunding projects often have a predetermined objective and give rewards to individuals who invest. 

 

Backers generally gain from supporting a campaign if the objective is accomplished. Backers can gain cash or equity if the firm has an exit event in the future, such as an acquisition or an initial public offering.

 

Crowdfunding invites a large number of investors to join and give a piece of the pie. This is a significant departure from more typical fundraising, in which enterprises and organisations seek funding from a single or a few large investors. 

 

Crowdfunding is also done predominantly online, whilst other kinds of finance are generally done offline.

 

 

Challenges Faced in Crowdfunding

 

Many people believe that crowdfunding is a simple or free method to get money, but it takes a lot of work to create a project that backers will see as a valued service. Success isn't assured, and as crowdfunding grows in popularity, backers have grown more selective about the initiatives they support.

 

Obtaining this kind of popular support might be difficult. It demands a strong marketing technique, dependable founders, and a high-quality product. 

 

According to Ryan Sim, general director and co-founder of We The People, a firm that solely offers crowdsourced items, the problems of crowdfunding are numerous. He outlined five major issues that beset reward-based monetization strategies:

 

1. Formulating and maintaining a low-cost marketing plan before, during, and after the campaign.

 

2. Creating appropriate language in the campaign description to pique interest in the product or service.

 

3. Creating an educational and interesting marketing film that describes the product and its benefits (the primary problem being that creating a genuinely effective and high-impact video is pricey).

 

4. Developing and organising a rewards programme in order to enhance ROI in a planned manner.

 

5. Identifying the most successful and cost-effective award fulfilment method.

 

(Check this out - Equity Financing)
 

 

Tips for Crowdfunding

 

There is no one-size-fits-all strategy to crowdfunding, however, there are five important tips to start on your path to success.

 

1. Communicate with your supporters

 

Connor Young, CEO of Ample Foods, emphasized the necessity of being open and honest with supporters throughout the procedure, even after the campaign has ended. He said that practically every product launch is delayed, so you must expect problems and respond with honesty and openness.

 

Toward the end of the campaign, it's a good idea to provide an update to the community, detailing where they may reach you next week and whether you want to change your focus to presales with your own site.

 

2. Distribute marketing materials that are both relevant and entertaining

 

A well-designed set of marketing materials will make your campaign stand out. With new crowdfunding projects beginning on a regular basis, it's critical to make your campaign stand out from the crowd.

 

The greatest approaches to achieve notoriety are to create good marketing materials and to distribute the campaign through your network. During their initial crowdfunding campaign, Ample created a small film to promote its product.

 

3. Get ready for the campaign

 

Prepare for the campaign before starting it for the greatest crowdfunding outcomes. Inform your relatives and friends that you will be launching a campaign. Prior to the launch, be active on your personal and corporate social media profiles. Allow potential backers every opportunity to locate you.

 

4. The UVP (unique value proposition)

 

Keep an eye out for organisations that are utilising technology in novel or unusual ways, or that have the potential to disrupt an established industry. Try to establish their USP, what makes them distinctive, and ensure that they are offering a clear and distinct answer to the market.

 

5. Investigate the market and traction

 

A product or service is only valuable if potential customers are interested in it. Investigate the market they want to enter. Is there a market for their goods or room for expansion? You may also search up the company's traction to get information on how their concept is performing in early markets.

 

(Also Read - Initial Public Offering (IPO))

 

Crowdfunding is a low-risk, high-reward technique of raising startup funding. There really is no explanation why you can't participate in the likes of Oculus Rift with a highly successful business proposal if you use all of the resources available to develop a captivating marketing campaign that connects with consumers.