If you're a business owner you've probably heard a lot about crowdfunding. You might be considering whether it's right for you at this point.
Here's a quick list of the ways in which crowdfunding helps businesses:
Valid market research
Faster access to cash
Better odds of being funded
Build your brand or start a business
Save your business
Leg up in publicity
Better audience building
Widespread professional support
Significant effort goes into running a successful crowdfunding campaign. However as this article will prove to you, the advantages justify the effort.
(#11 offers the biggest advantage so make sure you read that!)
Let's get into it!
#1 - Valid Market Research
What if you had a crystal ball that could predict how well your product would do in the market, before you commit capital to producing it?
And what if this crystal ball gave you real metrics that you could extrapolate to plan future enhancements as well?
There's no crystal ball but this is pretty much what crowdfunding can do for you!
A common headache most business owners face is determining whether their product will achieve a good market fit or not. It isn't just small businesses, large conglomerates lose sleep over this too.
Market research as it is carried out traditionally has many flaws in it (ahem....New Coke). For one thing you need to get the size and demographics of your focus group just right.
Next, your information collection methods need to be relevant and not influence participant answers one way or the other.
Online businesses have come up with better ways of testing the viability of their products. For example, some businesses drive traffic to their product listings and measure the number of 'Add to Cart' actions carried out.
However, this only results in brand damage if you can't deliver the product quickly enough.
This is where crowdfunding helps immensely. By publicizing a rewards based campaign for your product, you remove all of the barriers and prejudices a customer might have.
You're selling them your product through your campaign and you get to measure the level of demand.
Best of all, you don't need to sink money into manufacturing until you've received money from your backers! Contrast this to the traditional approach companies take.
Working capital is tied up in inventory and manufacturing costs and if the product bombs, your business might follow it.
Small businesses cannot afford such costly mistakes. Ideally you'd like to get paid to produce your product so that you're not relying on debt financing in the interim.
This is what crowdfunding allows you to do!
It isn't just testing your product, you can also effectively test your audience. I've expanded on this in points #8 and #9 below.
#2- Cheap Money
If someone walked up to you, handed you a wad of cash and told you there were no strings attached to it, and that all they wanted in return was your product, would you take it?
Welcome to the world of crowdfunding!
If you have a great product and have a reliable track record in the field, odds are good that you'll have angel investors or even venture capital firm lining up to fund you.
You could decide that you don't want to give up equity and opt for debt financing instead.
There's just one problem. All of these options are expensive! In the case of equity financing, they're downright usurious in most cases!
Think about it: If an equity investor isn't going to provide you with mentorship or sales opportunities, what exactly are they bringing to the table for the long term?
Sure, their cash will help you tide over shortfalls in the interim but is this worth giving up a chunk of your profits over the long run?
Rewards based crowdfunding removes the need for you to give up equity in your business. In fact, it doesn't even call for you to pay interest! The money you receive is effectively a manufacturing loan without interest.
If a lending institution offered such terms, startups and small businesses would be circling the block trying to claim it.
However, many businesses are hesitant to use rewards based campaigns when the terms are pretty much the same. Sure, the platform will charge you a fee but this is usually just five percent.
That's nothing compared to what you would pay in interest or in opportunity costs!
#3 - Faster Access to Cash
Imagine a world where you apply for cash and receive funding within a few weeks. What would this do for your capital efficiency and cash flow?
Again, this is not a pipe dream.
If you're an established small business with a product that suits a rewards based campaign, you should be crowdfunding all the time instead of applying for working capital loans at the bank.
Post the credit crisis of 2008, big banks have been taking close to three months on average to process small business applications.
Online lenders in contrast take just three to five days. However, their interest rates can vary and some of the terms might not suit you.
The average rewards based campaign will run for a month at the most. If you hit your funding target, this means you'll need to wait for this period of time to receive the cash you need.
Hopefully, you can now understand why I said that crowdfunding is a no-brainer for the firms that can achieve success with it.
You will have to plan ahead of time and carry out a number of marketing related tasks. However, you'll need to do these things anyway if you wish to sell your products.
Why not use the advantage that the crowdfunding method gives you to secure financing?
It certainly makes more sense than waiting at the bank for three months, just for the privilege to be slapped with interest when you are approved.
#4 - Better Odds of Being Funded
Many entrepreneurs don't appreciate this fully. Let's take a step back and examine how the traditional lending process works.
Your application is submitted to a loan officer who uses their own discretion to decide whether your loan ought to be approved or not.
In other words, ff they've had a particularly bad run in with their mother-in-law that day, you might as well pack up and go home!
Alright, I'm exaggerating a little bit. My point is that the fate of your loan depends on the discretion of a single person and their prejudices.
With equity financing, you're now dealing with a group of investors. Sure, you have the advantage of more eyeballs on you proposal. However, their considerations are completely different.
The fate of your loan depends on the discretion of a single person and their prejudices.
Your fit with respect to their existing portfolio is what is being looked at. Your expertise and ability as an entrepreneur is not as important. Neither is your track record.
This is why you'll often see mediocre companies that tick a few boxes get funded in place of radically creative companies.
There are a few other differences between traditional funding and crowdfunding that work against businesses as well.
Crowdfunding removes these barriers. First, you have a large crowd looking at your business idea. This means there are more opinions in the mix. Second, there is built in urgency in the campaign since it's not going to last forever.
Thus, your odds of raising the money you need are high. It's true that most crowdfunding campaigns are unsuccessful. However, this is explained by the fact that most campaign creators don't take the time to plan ahead of time.
Most of them simply don't respect their backers or the process. Looking at crowdfunding as free money is a sure shot way to fail.
Carry it out intelligently and you will hit your goals. It's just common sense!
#5 - Build Your Brand or Start a Business
Around 2013, Mitch and Andrew Greenblatt had an idea. Mitch was an influential blogger in the watches niche and was running a website focused on reviewing them. He also sold old timepieces on eBay as a hobby.
Andrew was the entrepreneurial one and had a string of successful business launches. The brothers figured: Why not start their own brand of watches?
This is how Xeric came about to be. The company is now a successful watch producer and has, rather uniquely, raised money for and launched all of its designs on Kickstarter. Their first campaign was in 2013 for the Xeriscope watch.
Since then, they've launched 11 more campaigns and have reached a stage where they're releasing newer editions of their original watches thanks to demand.
Talk about a success story!
Xeric's success is exceptional but achieving even half of their success is not as unrealistic as it seems. Plenty of startups use crowdfunding to start their businesses and to sustain momentum.
Compare this to traditional fundraising methods and you'll see the breadth of opportunities that crowdfunding provides.
What were the odds of a bank funding Xeric's business idea? Most of them would probably have no idea of what digital advertising even is! A bank wants to see stability and would have demanded a history of watch sales before even considering a loan.
Crowdfunding is built around the idea of people backing something cool that they can treasure. It's about providing backers with a feeling that they did something good.
Use this to your advantage and build the business that you've been dreaming about.
Speaking of advantages, a crowdfunding audience is rather unique and it helps new business achieve success. I've explained this more in point #9.
#6 - Zero Limitations
What if you're not a traditional businessperson or entrepreneur? What if your gift is the ability to create amazing graphic novels?
Perhaps you're a musician or a filmmaker who has an idea for a whole new genre of art? Alternatively, you could be a team of developers who just want to create cool video games.
All of these ideas find a place in crowdfunding. It really doesn't matter what your idea is. As long as you believe in it and can raise the backing of your audience, you can make it a reality.
Crowdfunding is just one of the many ways in which business has opened up for many entrepreneurs and has leveled the playing field.
Previously, those with cash and access to capital were the ones who could realistically hope to start a successful business. With crowdfunding, raising capital has become more accessible than ever.
This has resulted in a number of products being launched that wouldn't have had much hope of raising money in the past. You've already read about Xeric.
Other examples include Bragi, a maker of wireless headphones. The company started off with a pair of headphones but has now expanded to a full software suite and sells enterprise solutions as well.
If that example sounds traditional, how about Dwarven Forge? This company sells modular game terrain sets.
No, I had no idea what that meant either! And neither would a traditional bank have ever funded something like this.
It just goes to show that crowdfunding is available for all kinds of businesses and ideas. You don't need to fulfill mythical requirements or depend on the discretion of a single person or a board.
Raise money for your product and keep the profits to yourself!
#7 - Save Your Business
Crowdfunding isn't useful just for raising money when you're starting out. You can use it to save your business as well.
Many businesses turn to equity crowdfunding in such situations. Generally, equity crowdfunding is not a great idea unless you really need the financing. The best part is that despite the phrase 'equity' in the name, you can raise debt and convertible debt as well.
Equity crowdfunding was legalized in 2012 thanks to the JOBS act. Under this law companies can raise funds according to three classifications. The lowest tier is called Reg CF and under this you can raise up to $1,070,000 from investors.
The next two tiers come under Reg A+. Tier One companies can raise up to $10 million while tier Two companies can raise up to $50 million. There are different disclosure requirements that need to be followed as well depending on your classification.
All of this comes under the umbrella of debt crowdfunding (despite the term equity being attached to it.) Refer to that link to learn all about how regulation works and which disclosure requirements might apply to you.
The chart below displays the most successful regulation crowdfunding campaigns of 2020. The data is sourced from Statista.
As you can see, there's quite a lot of money to be raised through equity crowdfunding. A lot of companies opt for this route due to difficulties with regards to raising VC or angel funds.
It's something that you can use as well to revive your business and bring in the cash needed to get it back on track.
#8 - Leg up in Publicity
What if you could streamline your product launch as well as marketing into one seamless stream of activity? In other words, what if everything you did for your product launch and fundraising counted towards your marketing efforts a well?
When raising capital, startups typically compartmentalize the two processes. After all, presenting a pitch deck to a board of VCs has nothing to do with marketing.
You'll still have to go out and market your products and spend money in publicizing it. This places additional demands on your time.
With crowdfunding, the fundraising and marketing process are one and the same. Crowdfunding is all about mobilizing your audience in order to raise money from them.
You'll be active on social media, on your blog and even in the media if you manage to get in touch with a few journalists. You'll even be carrying out influencer marketing and word is going to spread about your product.
This streamlining saves entrepreneurs a lot of time and you can focus on delivering your product a lot quicker than compared to the traditional fundraising process.
It also helps you build momentum with your fan base. Speaking of which...
#9 - Better Audience Building
If you create an eCommerce website and being selling products, your biggest headache is going to be directing relevant traffic towards it. You cannot build it and hope that they'll come anymore, in other words.
Social media platforms offer free and paid targeting options but these are hit and miss at best. A platform such as Facebook has close to zero organic reach and relies heavily on your spending dollars on its overrated ad platform.
If you decide to sell your products on Amazon through its FBA program, you're going to be at the mercy of its ad platform and of random clicks from your competitors that will drive your costs up.
In short, the methods of building an audience through paid ads are useless for the average business owner.
Some platforms have great organic reach but once again, you can't be sure how relevant the clicks you're receiving are. Crowdfunding removes any doubt with regards to the quality of your audience.
After all, the people visiting your campaign page and donating money have qualified themselves immensely. I mean, they've given you money before you've even manufactured their product!
How much of a vote of confidence is that?
If you fulfill their demands and launch another campaign in the future, do you think they'll back you once again? Does the sun rise from the east?
Crowdfunding is a great way to build an audience of your greatest fans and raise money for your business at the same time. You'll spend more time focusing on the important issues and this will reduce time spent doing things that have no relevance to your customers.
#10 - Widespread Professional Support
In the earlier days of crowdfunding there was a wild west feel to it. After all, this was a new frontier and no one really knew what drove traffic and how campaigns worked.
The platforms themselves were tweaking their algorithms and there was no data that could help you figure out how to best present yourself.
Many campaign creators threw up a page and posted it on Facebook, hoping it gained some traction. It's what helped this guy raise money for a potato salad!
These days, crowdfunding has reached a stage of maturity and creators have widespread support from the law and from other professionals operating in the space. Everything from your pre launch activities, to your campaign pitch, its length, the quality of your video content and so on is supported.
You can get help in all of these areas and it's as simple as reaching out to a professional who can help you with this.
Crowdfunding might seem daunting to you but given the support structure that is present, it's time for you to hop on board and take full advantage of this!
#11 - Unconventional Marketing
I've saved the best one for last. You've probably experienced by now how big social media companies are simply in it for the ad dollars.
Google's ad platform performs the best thanks to its advantage in search. However, the likes of Amazon and Facebook offer ad platforms that offer close to nothing for the small advertiser and are inundated with people spamming you with useless clicks.
All the talk of targeting by interest and so on are of no use when people aren't really interested in clicking on ads and have grown blind to them.
You need to come up with alternative marketing channels to spread the word. Unconventional is what has always worked in marketing and to this effect, utilizing crowdfunding to spread the word about your product has huge benefits.
All of the previous points show what an amazing opportunity crowdfunding presents in terms of spreading the word. Your marketing budget and time will be spent on activities that will bring you real results and will help you create an audience of your most rabid fans.
So stop wasting time with conventional and tired digital marketing methods. Focus on crowdfunding and get a leg up on your competition!
So there you have it! Crowdfunding can help your business in so many more ways than just these.
Don't let the amount of work you need to carry out to ensure campaign success deter you. Instead, plan ahead of time and notice the dual advantages many crowdfunding actions give your business!