Crowdfunding has become one of the buzzwords of the early-21st century, with the likes of Kickstarter revolutionising how companies seek funding. While it may be the latest fashionable trend, especially for high-growth tech businesses, it may not be the correct route for your company. Let’s take a look at some of the things you should think about when considering crowdfunding as a means of generating capital.
Don’t go down the crowdfunding route just because you saw other, successful companies doing it, or because it’s the big new thing. Before making any decision, make sure you’ve considered all of the options. Seeking investment from friends and family or from a bank continue to be great options for businesses, so think about those, too. Ensure that you know the pros and cons of each funding source.
Types of crowdfunding
The next question is which type of crowdfunding you’d go for. Typically options fall into four categories: donation, debt, equity and reward. Donations are just that – the creditor gives you money because they believe in your product or service with no expectation of remuneration, while debt crowdfunding means that you have to pay back what you borrow within agreed terms. Equity-based models, on the other hand, offer a stake of the business in return for funding. The reward approach is that most commonly seen on the likes of Kickstarter where creditors are promised a first version of the product when it goes to market. Each one comes with its own set of potential pitfalls, so be sure to do your research.
Although the model would suggest a quick and inexpensive way of raising finance, costs can sometimes be prohibitive. Crowdfunding platforms will often charge high set-up costs to launch your funding bid in the region of 7%-12%. Many will charge a transaction cost per investment which may take the overall cost to between 15%-20% of the amount raised. Furthermore, before you start, your bid you may need specialist advice from solicitors to ensure that your offer is ready to go public and from accountants to help demonstrate the financial viability of the business.
The reasons crowd-funders invest in a business are often completely different from those of a typical finance deal. They may see the person behind the business and choose to invest, or your business might represent a cause they really believe in. Be aware of these motivations and consider carefully the story you wish to present and to whom you’re presenting it.
Finally, its worth considering which platform would be most suitable for your venture. There are different sites available for a variety of sectors and ideas. Specific project based and social ventures may consider sites like Kickstarter or Indiegogo. For start-ups looking for growth there are the likes of Seedinvest and Fundersclub, and there’s a whole host of smaller sites targeting specific product areas.
Crowdfunding is a great option because it turns the traditional funding model on its head, giving you a large number of small investors as opposed to a small number of big investors. That means that companies that would otherwise struggle for funding can get the cash to make their dreams come true. Just make sure you think hard about whether or not that model is right for you and that you understand the ins and outs of the available options.
We’ve more articles on getting your head around start-up finance at our finance portal.