Crowdfunding as an alternative source of business financing

An Insight into Crowdfunding: An Alternative Source of Finance

Alternative sources of financing can be defined as the finance channels that do not fall under the traditional finance systems, such as regulated banks and capital markets. With alternative sources of finance, companies, especially start-ups, can access necessary capital without going through a long process.

Crowdfunding is a common alternative source of finance, and it is believed that the concept originated in 1884 when the American Committee for the Statue of Liberty had no money to construct the Statue's pedestal. More than 1000 Americans donated to help the Committee work on the Statue’s pedestal.

With the internet allowing crowdfunding, you will come across more than a hundred crowdfunding sites.

So, without wasting any time, let’s dig deep into the subject and understand how crowdfunding is helping businesses grow.

The Two Main Types of Crowdfunding

The two main types of crowdfunding are:

1. Donation crowdfunding

In this model, donations are made in exchange for products, special pricing and rewards. The perks are the only thing you can get in return in this model. Two popular websites offering donation crowdfunding services are Kickstarter and Indiegogo.

2. Investment crowdfunding

Investment crowdfunding is a step ahead of donation crowdfunding. The companies sell ownership stakes in the form of equity to the funders, making them shareholders of the company. Investment crowdfunding gives you an opportunity to get a financial return.

Despite the huge popularity of crowdfunding, it does not guarantee investments. Research shows close to 50% of campaigns fail on Kickstarter. On the other hand, donation crowdfunding comes with serious repercussions. Often investors have demanded their returns when businesses asked for money again for expansion.

So, before you take the step to ask for funds from people, understand the necessary steps and proceed cautiously.

Steps to Successful Crowdfunding

1. Evaluate your business

While crowdfunding platforms keep things simple for all, it is necessary to evaluate if your business (big or small) can make money out of it. Ask yourself a few simple questions before logging in to any of the crowdfunding websites:

• Do you have a business plan and product prototype?
• What makes your product or service unique?
• Is there a demand for your product or service?
• How much money is needed for your business?
• What have you got to offer to investors?

Once you get answers to these questions, you can take a step forward and start your campaign.

2. Select the appropriate crowdfunding type

You have to select the correct crowdfunding type to move ahead with the process. Crowdfunding can be from people who are willing to help you with some money without expecting anything in return. It can also be equity-based or debt-based. You can decide on giving shares of your company in return for their investment or ask people to lend you money and pay them back with interest. The type depends on your business, and you will be the best person to determine which is the most appropriate.

3. Pick a crowdfunding platform

As crowdfunding has gained immense popularity, you will find many websites that allow businesses to start their crowdfunding campaign. Some of the best crowdfunding platforms are Kickstarter, Indiegogo, EquityNet, Patreon and many more when you browse the internet. You need to check all the aspects before choosing a website to start the campaign.

4. Plan the campaign page

Each website has specific guidelines for creating the page. It is crucial to go through the guidelines before you set up the page. Here are a few tips for planning the campaign page:

• Choose a clear title
• Create a video or a written pitch
• Set a reasonable fundraising goal

You must ensure that the campaign page is engaging enough to put some money in your pockets.

5. Create your promotional plan

You have to make sure that your campaign gets noticed. Creating a campaign page is not enough; you must find ways to promote your campaign to attract people. You can use any of the following ways to promote your plan:

• Email lists
• Social media
• Blogs and forums
• Press
• Paid advertising

All these can help you promote your campaign. However, you need to use your money wisely when you plan to promote your campaign.

6. Stay active

Instead of relying on machines to get your work done, you must stay active throughout the campaign. Generally, funding comes in during the first few days and the last few days; it is crucial to stay active throughout the entire campaign to make it successful.

Procrastinating from sharing regular posts will not be a good idea if you need the money. But do not post frequently. There are cases where people have started ignoring frequent posts or emails from businesses.

Ensure you share all the information about changes and notable news with all your contacts to keep them updated.

7. Deliver on your promises

Research says that close to 9% of successful Kickstarter campaigns do not fulfil their promises. You must not be on that list.

There are crowdfunding types where businesses promise to share rewards or pay interest for the money they have invested. If you have promised these, do not keep things on hold and share the necessary benefits.

Also, be honest about the progress and inform your investors in case there are delays or setbacks.

Conclusion

Entrepreneurs struggle to gather the necessary money to start their businesses. Banks and other financial institutions have a complicated process and demand a high rate of interest. Alternative sources of finance have made things easier for all. Crowdfunding has been the best possible way of getting money. But it is equally necessary to understand the best ways to pull off a crowdfunding campaign and make the most out of it. Follow everything mentioned above if you are willing to start a crowdfunding campaign.