Accessing funds for small and medium enterprises and startups remains a critical issue for a majority of entrepreneurs. The 2008 financial crisis led to a failure of a number of banks. This required banks world over to keep some portion of capital in the form of reserves as a result of the implementation of the Basel III norms.
Further, such a regulation limited the potentiality of the banks to extend loans to startups and SMEs..
Apart from investing one’s personal capital, entrepreneurs widely depend on loans from family and friends to provide capital for their venture. This is the most commonly used methods of financing a business. This is because through this method entrepreneurs do not have to worry about the credibility issues which they usually encounter while raising funds through banks. Family and friends are aware of their skill set and therefore do not hesitate in providing requisite funds for the business. But all the entrepreneurs do not have the privilege of having wealthy relatives who could provide such a support.
Similarly, getting loans from banks is also not easy. This is because banks hesitate in extending loans to the SMEs and startups given their risky venture and lack of collateral.
Likewise, venture capitalists also extend small amount of funds to the SMEs. Majority of them provide money to larger startups in particular sectors of the economy. Moreover, they demand higher returns for investing in private equity companies owing to their higher risk.
So before discussing the process as to how to crowdfund, let’s first understand what is crowdfunding and types of crowdfunding.
What is Crowdfunding?
Crowdfunding is basically defined as gathering of resources such as funds, tangible goods, etc. from people at large via a web based platform. People providing the resources thus get both tangible and intangible benefits. These benefits depend on the type of crowdfunding platforms where entrepreneurs prefer to obtain the resources.
Therefore, crowdfunding involves three participants, namely:
- Population or Crowd – These are the people who provide resources such as funds, money, tangible goods etc. to the fundraisers.
- Crowdfunding Platform – This is the platform that gives access to the investors of the various innovators seeking investments in their business ideas.
- Crowdfunding Campaign Creators – These are the people who seek investment for their innovations or startups.
Types of Crowdfunding Platforms
There are various types of crowdfunding campaigns that innovators can create to raise the requisite resources for their business idea. These are as follows:
1. Donation Based Crowdfunding Campaigns
These are the crowdfunding platforms where the funders do not get anything in return for their contributions. The only benefits that the funders receive are the tax deductions against their donations based on the type of project funded by them.
2. Reward Based Campaigns
In this type of campaign, the fund providers receive goods or services in return for their contributions. Here, the campaign creators pre-sell the products or services in exchange for the resources they receive for their business idea.
Furthermore, this model can be subdivided into two types: all or nothing and keep it all. “All or Nothing” means the campaign creator will not receive any money until the minimum funding goal is achieved. Whereas, “Keep It All Means” that the campaign creator can retain the funds irrespective of whether the minimum funding goal is met or not.
3. Debt Based Campaigns
The contributors in such a crowdfunding campaign get interest for the amount contributed by the funders. This is a type of micro-lending where contributors can choose the project based on the rate of return and date of maturity.
4. Equity Based Crowdfunding Campaign
The fund providers receive equity share in the ventures funded by them.
How To Crowdfund Your Business Idea?
It’s no hidden fact that the majority of funds raised by a campaign creator come from his family and friends on these crowdfunding platforms. Despite the fact these crowdfunding platforms play an important role in helping the innovators in seeking funds for their ventures. These platforms make it easier to raise funds from family and friends as they help in overcoming the hesitation associated in raising money via them.
1. Promote Project Through a Separate Web Page
These platforms dedicate a separate web page to each campaign creator’s project that is open for access to the public. This gives the campaign creator the ability to access a wider audience. Thus, it helps in boosting confidence to the fund contributors with regards to the quality of the project. This is because the platform remains open for fund providers to track project activity. The fund providers can track activity in terms of funds raised as well as the reviews shared by other contributors.
2. Take Requisite Fee For the Campaign
The campaign creators are required to pay a requisite fee for running campaigns on these platforms. This lends credibility to the campaign creators’ project since contributors know that there is a cost involved in running a campaign on these platforms. These costs are in terms of fee deducted by the crowdfunding platforms and time invested in running the campaigns.
3. Follow Rigid Process To Prevent Fraud
The crowdfunding platforms ensure the genuineness of the projects being funded via them. This is because they follow a rigid process to ensure the credibility of the campaign creator and his project. This includes the background check of the campaigner and anti-fraud procedures thereby ensuring the safety of the investors.
How To Create a Successful Crowdfunding Campaign?
In order to run a successful crowdfunding campaign, the campaign creator needs to consider the following points:
1. Understanding the Target Market
For your business idea to be successfully funded, it is important to have a good number of people who believe in your innovation. The person providing money for your business idea must desire the product or the service for which you seek to raise requisite resources.
Thus, understanding what your investors want is crucial. This is because you will be ultimately creating campaign keeping their need or intent in mind. Therefore, before creating a campaign, you must authenticate if your product or service is needed by the investors at large. Some of the questions that you can consider include:
- Is your business idea already there in the market?
- What is the unique selling proposition of your offering?
- Do people need such an offering?
- Whether there exists a good market for such an offering?
2. Choosing the Crowdfunding Platform That Fits Your Requirement
The fundraisers must determine the strategy for the campaign before starting the campaign on crowdfunding platforms. One must determine the type of project for which the fund is to be raised. These could include:
- Raising funds for a one time project involving a product or a service
- Obtaining funds for a product or a service offered by a startup or an established company
- Raising funds for financing a company
Such a decision with regards to the type of the project would help the fund seeker to choose between the various types of crowdfunding platforms.
For instance, donation based and reward based campaigns are usually used for one time projects or a single product or service by the startups. Here, the fundraisers need to create a prototype in order to help investors understand what they will get in return for the contribution made by them.
Similarly, equity-based campaigns are commonly used by established companies for funding various projects.
Finally, the fundraisers also need to consider the advertising opportunity and the strength of the investor network of a particular crowdfunding platform.
3. Set A Reasonable Fund Target
The campaign creators need to clearly specify the return that the contributors will get in exchange of the resources provided by them. As mentioned above, there are various motives for which the contributors engage with the crowdfunding platforms. These could include:
- Rewards – The rewards could include pre-selling the goods or services that the campaigner intends to create to the contributors.
- Not-For-Profit Cause – Here, the contributors get motivated to associate with the cause pitched by the campaign creator. The idea is to donate to the cause of the campaign.
- Share in Equity or Interest in Debt – Here, the campaigner needs to clarify the scheme for equity in case of equity based campaigns. Whereas, in the case of lending or debt based campaigns, the fund seeker must clearly mention the rate of interest and the maturity period.
4. Clarify the Return For The Investors
This is again a crucial decision to be made by the campaign creator.
- Too small a fund target can lead to insufficient funds for giving wings to the innovation. Lesser funds would not enable the campaign creator to deliver the project he seeks to undertake.
- Similarly, bigger fund target may increase the odds of the project being under-funded. This would mean reimbursing the money to the investors on certain platforms in case the campaign is not able to attain the threshold fund.
- Decision needs to be taken with regards to over-funding of a campaign. This is because in case of equity funding, over-funded projects may lead to the dilution of the stake of the fund seeker.
- Finally, the campaign creator needs to decide on the duration for which the campaign would last.
5. Design The Marketing Campaign
Once you are clear with the type of campaign and the funding platform, you must plan for the designing of the campaign. One could start with finding similar campaigns created by other campaign creators. This would help in understanding the dynamics or elements of a successful campaign as well as campaigns that did not work.
Some data about such campaigns would help the campaign creators in designing their own campaigns. There are certain things that can make your campaign successful. These include:
- A clear “Title” for the campaign page
- Video or written pitch or both that clearly define your idea. This really helps in showcasing your product or service in a transparent manner. Further, it is easier for investors to watch the prototype of your product or service in the video. This is because no one likes to invest much time and energy in understanding the product or the service offering of the campaign creator.
6. Prepare a Marketing Plan To Promote Your Campaign
Simply putting your product or service offering on the crowdfunding campaign page would alone not help you in getting funded. In other words, there are higher chances of your campaign being a failure. This is because you just cannot rely on the audience of the chosen platform. Hence, you need to promote your campaign even before it gets started.
There are various ways through which you can promote your campaign. These include:
- Asking bloggers or journalists to talk about your campaign on their platforms
- Using paid advertising for the promotion
- Setting email campaigns educating relevant people about your campaign
7. Track You Campaign and Make Adjustments
There are some platforms that provide you with the flexibility of making certain adjustments during the campaign. For instance, there might be a situation where the campaign creator eventually comes to know that the fund target set by him is achievable. This may be known after tracking the activity of the campaign in the first few days. Thus the campaign creator can adjust the fund target figure so that the project gets fully funded.
8. Keep The Word That You Pledged
Simply getting fully or over funded for the project is not sufficient. It is extremely important that the campaign creator fulfills the promises in terms of the product or type of service made by him in the campaign. This is because failing to live up to the promises would break the trust of the investors providing funds. Further, they would hesitate in funding any future projects that the campaign creator would seek funds for on the crowdfunding platform.
To help you with understanding the concept of crowdfunding, here is an infographic that will help you to know what is crowdfunding and how to crowdfund.