With the rise of the number of businesses choosing crowdfunding as a method of raising funds, it’s clear that crowdfunding is here to stay.
Crowdfunding has a range of advantages, from being accessible to most people, to reducing the amount of debt that the founder would owe to the bank during traditional methods.
But is it right for your business? Here are five things you need to consider before choosing to finance your business through crowdfunding.
1. The different types of Crowdfunding
When crowdfunding first became popular, it was largely used to fund creative projects, or to raise money for charity – think JustGiving. With charity-based, or creative project-based crowdfunding, the crowd donate money to the cause and don’t expect anything in return. This model obviously doesn’t work for businesses, so it had to undergo an evolution. As a general rule, crowdfunding for businesses is either ‘rewards-based’ or ‘equity-based’ – and it’s important that you know the difference.
With ‘rewards-based’, the backer will give money to the business in exchange for a reward. This might be anything from a branded t-shirt, to a sample of the product they are making. Typically, a business will establish a minimum donation amount in order to get the reward, and will specify the reward before the crowdfunding campaign begins.
‘Equity-based’ crowdfunding is where the investor pledges money in exchange for shares in the company. If a business is offering equity, it means the share of the company that the founder owns will be diluted. It’s vital that you’re aware of these options before deciding to crowdfund, so you can weigh up which is the best option for you.
2. Different Platforms
The days are over when the only crowdfunding platforms available were Kickstarter and IndieGogo – nowadays there’s a range of crowdfunding platforms that vary in different ways. Make sure you do your homework – and don’t just settle for the one that charges the least. Ask around, ask a search engine, ask anyone with knowledge – and make an informed decision.
3. Your Goals (aka having a plan)
Before you even consider crowdfunding, you need to be realistic about your goals. What do you aim to achieve? How much equity do you want to give away? How will you use the money? These are all questions that you should be asking yourself. If necessary, consult a business advisor and get them to help you set out a detailed plan. Certain platforms will require a plan before letting you pitch your idea through them, so it’s nothing but helpful to have one.
4. How Much Money You Want to Raise
This sounds like an obvious one, but you need to set a realistic target. Bear in mind that most businesses don’t aim to raise the total amount of funding in the first round: if you need to raise £500,000, there’s nothing wrong with asking for £100,000 first and raising the remainder in increments.
Crowdfunding has funded some hugely successful campaigns in the UK, the USA, and other countries. However, it’s not legal in every country – and other countries have strict laws surrounding it. Make sure the country you live in allows crowdfunding, or you could be in for a nasty surprise! Also make sure the platform you use, is regulated by the relevant authorities.