As I am sure you can imagine, as you are reading this article, one of the major difficulties for small and medium enterprises (SME) is funding. No matter if you are just launching as a company or try to fund certain projects or product launches. When banks are not an option, either because of your company ethos or credit history, crowdfunding platforms come into play.
What is crowdfunding?
Throughout Europe, according to a study done by the European Commission Financial Services User Group, shows an increase in crowdfunding popularity. They show that countries such as Germany and the UK are using the internet to search for more and more crowdfunding platforms. This increase in popularity would suggest that these platforms are gaining more and more success.
But that still leaves the question, what is crowdfunding?
In a nutshell, crowdfunding is asking investors, often members of the public to invest in your business. It a great way to gather funds from a large number of people for any number of reasons. You can use these platforms for the expansion of your company, to fund a certain project or help the launch of a new product. Some enterprises even fall on crowdfunding to help when times are hard.
Types of crowdfunding platforms
Before you can begin to make any steady and guaranteed income off crowdfunding, you need to know which the right type for you is. There are four main types:
- Donation based: Where investors donate funds and expect nothing in return. Normally suited for charity or events within a community.
- Reward based: Investors donate with the expectations of a reward relative to their donation. This works very well with product launches.
- Equity based: Investors receive a share of your company. Ideal for ambitious growing companies with solid plans.
- Debt based: The closest to working with a bank. Investors lend your company money and receive interest back. These are best suited for well-established companies with a solid credit history.
All of these types have their own benefits and risks, so it is important that you research and find out which best suits the ambitions of your company. And also fits around your reasons for starting crowdfunding in the first place.
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Risks and Benefits of Crowdfunding (General)
The European Commission has a long list of risks and benefits that can be found when crowdfunding. These are mostly seen from the perspective of an investor, so if you can offer security against these risks, it will help you avoid them and thus, gain a steady income from crowdfunding.
– What is referred to as “wisdom of the crowd”. This allows you to spread the risk over a number of people, with potentially high rewards.
– Project risk. This relates to any early-stage project or company, as they have the highest risk of failure.
– Asymmetric information. This generally means that the information given to the investor about the risks and returns of their investments are not entirely clear.
– Opposing selection. This refers to the difference between high-quality projects and low-quality ones. High-quality projects or companies may want to avoid crowdfunding and stay with traditional investors, leaving low-quality on crowdfunding platforms.
– Moral Hazard. Investors face the risk of their money not being used for its designated purpose, this is the meaning of moral risk.
– Liquidity risk. This relates to investors not being able to back out before reaching completion. It is a fear of investors to not be able to retreat if they don’t see the fruits of their investment.
– Platform failure risks. The most successful platforms, that are the ones with most projects or companies, are the ones most likely to attract investors. Thus, making them more attractive to borrowers because there are more investors. This could lead to smaller markets ceasing to exist. It can be avoided by investors using smaller platforms or platforms being very much differentiated horizontally.
– Other risks. Other risks are insufficient funds being raised, fraud, cyber-attacks and disproportionate shares.
– Investor risk awareness. This relates to the experience an investor might have or not have. If they feel there are too many risks, they are more unlikely to invest.
– Platform measures to counteract on risks. Worry not, many platforms have ways to help prevent these risks. And other measures to help if any of the risks do happen.
Steps to a successful crowdfunding campaign
Organizing a successful crowdfunding campaign is not easy. Many platforms will help you with a lot of what needs to be done, but there are some important aspects that you or your company need to check in order to be truly successful.
1. Crunch the numbers. Make sure you know how much you need, be clear on what you can give back to investors and how valuable is your business. Each campaign will require different numbers, so it is important to have them straight.
2. Have a clear timeframe. Allow time for preparation, for the duration of the campaign and after for the funds to be cleared. It is also important to consider how long the project will take.
3. Have a good story. The numbers might be the best they possibly can be, but without a heartfelt story, you are unlikely to get investors.
4. Prepare everything. Make sure you have all the media you will need, the pitch, everything you think you will need. Checking past campaigns to see what they used is not a bad idea.
5. Hype. It is never too early to start building hype towards your crowdfunding campaign.
6. Keep people up to date. No matter at what stage of the process you are, keep people updated on any progress, information or little news snippets.
7. Be realistic. This is about your rewards, about how much you are aiming to achieve, about the project as a whole. Being ambitious is not a bad thing, but it is always best to be realistic.
There have been many successful crowdfunding campaigns on many platforms. Here are just a few.
Superhot. Using a rewards based type on Kickstarter this videogame was able to raise $250,000 while letting people who invested help design their own level.
BrewDog. This is probably the most famous company to use crowdfunding, because of their “anti-business” ethos. They opened it up to the general public using an equity based crowdfunding and more than 1,300 people signed up.
The Micklegate Run community event. Using a donation based crowdfunding, this small town was able to raise over £10k to turn the streets of a York into a soap-box racetrack packed with people cheering on.
Hans Fex. Hans Fex raised over $1.2 million to fund a small collection of unusual items. He used a debt-based crowdfunding model and found over 5,000 investors. His rare collection, which was all labeled, included: moon rock, dinosaur eggshell and mummy wrap.
As this article shows, it is more than possible to make a steady income with a successful crowdfunding campaign. No matter if you are an investor or a company, crowdfunding works, as the examples prove, and they are a good way to find funds.
Always make sure you do your research before investing in any company and be sure you know all the risks, aims and objectives of the campaign.