Doing your own business is great. And doing your own business is terrible. On the one hand, entrepreneurs are independent of bosses, managers, and office routine. They earn money and create brand new products or services. On the other hand, businessmen are constantly looking for funds and never rest, actually. It’s necessary to pay close attention to your brainchild, invest in it, solve myriads of issues, and find new ways to make it even better.
Eventually, it all comes down to money. Some business owners get loans while others try to attract investors. But do you believe that it’s possible to raise $200 million with the loyal community only? Well, crowdfunding proves that it’s true.
Crowdfunding 101
Put simply, crowdfunding is a form of public investment based on relatively small donations from numerous individuals, groups, and companies. When traditional fundraising relies on partnerships with a few institutions, its alternative enables the crowd. Everybody from Seattle software companies to Melbourne charities can get money via crowdfunding.
The most popular approach requires a business owner to list his/her project at dedicated website like Kickstarter or Republic. It should include descriptions, images, videos, and all other things to engage as many backers as possible. People can choose the donation’s amount for which they get a certain reward. As a rule, bigger sums feature better rewards.
Despite the undeniable benefits like the independence from investors’ potential disruptive requirements, it’s important to remember that crowdfunding also comes with several rules. For example, campaigns have a limited time frame during which they must be finished. If the project fails to reach the goal and raise the minimum sum, all the money returns to backers.
Now, let’s look at crowdfunding types:
- Debt-based. One of the least popular forms is similar to traditional borrowing. However, instead of getting loans from banks, businesses cooperate with individuals. Other rules, including the interest rates, are the same.
- Donations-based. Another not as famous type is a viable choice for charity or non-profit foundations. It’s the simplest approach as fundraisers don’t have to return any value to backers, they only accept donations.
- Equity-based. This idea is similar to traditional investments. Business owners sell the company’s shares to donators so the latter ones become part-owners. This type is familiar for small businesses and startups but not as independent as others.
- Rewards-based. The most famous approach focuses on delivering specific project-related rewards to backers. Say, a team behind new sneakers can gift the first pairs to investors while a car-sharing business grants coupons or merchandise.
Further, we will focus on two last forms.
Pros and Cons of the Approach for Businesses
Okay, let’s move to the main topic. Crowdfunding is still a bit unusual fundraising strategy for a lot of companies. Most of the businesses opt for equity-based type because it’s familiar for them and similar to traditional ways of investing. Nevertheless, there are dozens of world-famous projects based on rewards. But what are the pros and cons, actually?
Advantages
- Global responsibility. For some brands, this point may act as a disadvantage but we believe in committed businessmen. By realizing how many people trust you and give you money, it should be easier to create a useful and top-quality product.
- Comprehensive feedback. With a little marketing effort, it’s possible to attract thousands of backers. Apart from money, they will deliver more valuable stuff – their opinions, ideas, and wishes. This is your target audience analysis, for free.
- New customers. Not only backers will share their attitude, they will become your core clients, most likely. Engage users to interact with the business to get loyal customers for this and upcoming projects.
- No upfront costs. All you need is to create an impressive description, fill it with shiny pics and videos, set reward levels (for the related crowdfunding type), and publish the project at the chosen platform.
- Total freedom. Both rewards-based and equity-based crowdfunding models are much simpler for businesses in terms of requirements. Backers don’t have the same level of influence as traditional investors do. Also, they can’t take money back.
Disadvantages
- Alternative pressure. Instead of traditional issues with investors, fundraisers have to worry about other things. Say, donators will want to get rewards just in time. People don’t like delays that often occur during development.
- Chance of failure. Unsuccessful campaigns come with two problems. Firstly, you won’t get a dollar from the backed amount if it’s less than the goal. Secondly, a failed project means huge reputational losses and lower chance of further success.
- Marketing importance. To attract the attention of potential backers, it’s required to invest in promos. Networking and personal connections are cool, plus crowdfunding sites help good projects to be featured. But you should think about marketing, anyway.
- Potential expenses. Without initial costs, crowdfunding features later expenses. Rewards-based projects may end up with an inability to deliver all promised products or services to backers. Equity-based teams simply have to give away company pieces.
Examples of Successful Campaigns
So, you want some proofs? Then check out projects with the highest amounts raised. Three of them (united in the one Pebble point) were featured at Kickstarter as this platform is the most popular for rewards-based models. Others are independent or hosted by industry-specific platforms.
- Star Citizen. The ongoing development of this video game by Chris Roberts has $216 million backed so far. It will establish a new multiplayer space world.
- Elio Motors. With $102 million, this campaign isn’t finished, too. Authors work on a budget three-wheel vehicle with potential 84 MPG.
- Pebble Technology. The company listed three models of its e-paper smartwatches with a total of $43 million raised. Projects are placed at 1st, 3rd, and 6th positions.
- Glowforge. It’s a laser cutter that can be used for various purposes, similarly to 3D printers. Developers were successful to get almost $28 million.
- We Build the Wall. A controversial ongoing project now has $24 million at GoFundMe. People donate their money to build the border wall between Mexico in the USA.
- Prison Architect. In this game, players can manage the entire prison! With $19 million collected, it was hosted by independent site and Steam.
- Flow Hive. The hive that allows getting honey without interrupting bees. A simple idea and nice realization granted authors almost $15 million.
You also can explore the full list but be aware that the highest ranked projects are based on ideas of blockchain and ICO. This form of crowdfunding provides for selling cryptocurrency tokens of the upcoming platform. For example, a decentralized development ecosystem EOS raised more than $4 billion! Still, crypto funding deserves a dedicated article, we think.
Best Platforms to Start Your Crowdfunding Project
Finally, let’s look at sites that allow business owners to launch their campaigns. Kickstarter is the most popular one with 440,000 projects and $4.3 billion raised. Indiegogo is the second largest platform as it has 800,000 campaigns but only $1,6 billion raised. Both sites apply a 5% fee for funds collected by successful businesses. For equity fundraisers, we can suggest Republic, WeFunder and CircleUp.
At the end of the day, crowdfunding is a viable alternative to traditional investments and loans. Banks always require a good credit score and apply interest rates while investors often try to change the development processes with numerous weird wishes. With the power of the crowd, you can get money to do what you want, without interruptions. Consider this idea.