Crowdfunding: an Alternative to Traditional Funding for Entrepreneurs
One of the biggest issues that entrepreneurs face is financial stability. The ability to financially grow and maintain a business, pay employees, develop products, and advertising is an ongoing concern of every business. Crowdfunding has made it more accessible for entrepreneurs who want alternative options for securing funding other than from personal investments, or close family and friends.
What is Crowdfunding?
Crowdfunding is requesting small or large amounts of money from a number of individuals to invest in the growth of your business. Crowdfunding connects entrepreneurs with individuals or investors through fundraising social media websites. Companies such as Kickstarter and GoFundme have become two of the largest fundraising campaign platforms over the years. Since the inception of Kickstarter, it ”launched over 450,000 projects and received pledges worth more than 4.3 billion U.S. dollars”. Gofundme has raised over 5 billion thus far.
Types of Crowdfunding
The most common type of crowdfunding is reward-based funding. Here, entrepreneurs request funds from individuals in return for special rewards. This can include receiving a free product, naming a product or having an input on the type of services being offered.
Another type of crowdfunding is equity-based funding (Lending Club, Fundable) are for more established businesses with at least $50,000 in annual revenue. Entrepreneurs can directly seek loans from investors by offering company shares or a percentage of the revenue of the business while eliminating the banking middleman. With the passage of the “Jumpstart Our Business Startups Act” (JOBS) equity-based funding has become easier by loosening the restrictions on capital fundraising. JOBS
Advantages of Crowdfunding
Increase company awareness -- offering an incentive or a reward such as the opportunity to name the finished product in exchange for funds helps consumers feel they have a direct stake in the business's success. Directly connecting with individuals helps grow your company's following, and increases customer loyalty. To a startup or any business having a large consumer following and customer loyalty is just as important as growing your financial capital.
Marketing and brand messaging -- these sites allow you to advertise and market to consumers. One can create a theme or convey a message about your brand. Taking the time to let consumers know what your business is about or creating a heartfelt theme will help increase company awareness and ultimately reach your fundraising goal.
Easier than traditional fundraising -- for a business that is in the early stages focusing on growing your business and securing financing, leaves little time to pursue traditional financial demands. In contrast to traditional fundraising, where one fills out loan applications or physically goes to a bank or investors, these fundraising platforms allow you to seek investments in one centralized location.
Customer feedback -- by directly connecting with customers, one can gain valuable knowledge about how consumers view or how you can improve your product or services. Engaging customers in questions, complaints, reviews, and ideas can help refine or brainstorm your company ideas so you can better suit the needs of your customers, this is also known as crowdsourcing.
Easier access to investors -- businesses have access to thousands of potentially interested investors in one location which allows for an efficient process.
Learn from investors -- you can potentially form partnerships with investors with knowledge and experience where you can benefit from their business network.
Offer stocks in the company -- allows privately held companies to offer stocks or a percentage in the company which was only available to publicly held companies until the JOBS Act. With the introduction of the JOBS act, privately held companies can test the market to evaluate whether they want to officially become a publicly-traded company on the stock market.
Less risk -- by offering stock or a percentage of your company, you have less risk because there are no fixed loan monthly payments that the company is responsible to pay. This is one less monthly debt to focus on while maintaining the cash flow to invest in the business.
Challenges of Crowdfunding
Many individuals assume with the accessibility of these websites funds are guaranteed, unfortunately, that is not the case. It requires substantial effort to convince consumers to believe in and support your project. The most successful campaigns have a strong marketing approach, large consumer following and a product or service that is in high demand. Keep in mind each individual project will encounter its own challenges that are unique to the specific business industry.
Other challenges that arise with equity-based funding is understanding the financial liability that results when you offer stock or a percentage of your company to an investor. From losing control of the company to sharing the profits are considerations that each business should evaluate.
To have a successful campaign, it is important to find the right platform to use to launch your campaign and do your research regarding the financial liability to you and or the company.