Raising funds without giving up equity is something that every entrepreneur wants to do. The problem is that traditional options come with a lot of bells and whistles attached that can hamper growth.Can crowdfunding provide an answer?
Can you carry out crowdfunding without giving up equity? Yes, you can! The answer lies in creating a great rewards based campaign that will excite backers and create an emotional bond between them and your product. This is an extremely effective way to raise funds.
There are some caveats to this that you should be aware of. For starters, rewards based crowdfunding might not be suited for you. Let's take a deeper look and see how you can figure out how it works.
Rewards Based Crowdfunding
So what is rewards based crowdfunding anyway and is it as legitimate as equity based funding? Is crowdfunding even a good option as compared to raising funds from investors?
Here are some statistics for you to chew on. Since 2012, crowdfunding in North America has raised over $17.2 billion. Yes, that's billion with a 'B'. Of this, $2.5 billion was raised via equity crowdfunding.
The rest accounts for donations and rewards based crowdfunding. Donation based crowdfunding, as the name suggests, is when backers donate money towards a cause such as fire relief or disaster recovery and so on. As such, this doesn't concern businesses.
Rewards based crowdfunding however has many advantages to it.
For starters, it has changed the way many companies launch products in the marketplace. The old way of launching was to conduct massive surveys and run focus groups so as to determine whether a product could achieve any traction.
There were two major issues with this. First, it costs money to carry out all of these tasks. Second, you're not guaranteed results.
Crowdfunding removes both of these issues in one swoop.
If you have a product on hand that you're ready to showcase but aren't sure if you ought to increase its production, running a crowdfunding campaign is a great way to assess demand. What's better, your backers pay you money upfront to buy your product and you can use this cash to fund operations!
Therefore, there's no need for you to worry about cash flow shortfalls between manufacturing and the product getting sold. There are a number of million dollar companies that once began as crowdfunded projects.
Ever hear of Oculus VR? How about MVMT watches? All of these projects started as ideas and their founders raised capital without giving up a cent in equity upfront.
Rewards based crowdfunding is also way less complex than traditional business financing. There are no loans to arrange and no papers to prepare or financials to disclose.
Having said that, don't think of this option as being a free lunch. It takes work to pull this off. Your product needs to meet a demand the market has and it needs to have some sort of proof that it delivers what it's supposed to.
So how can you do this?
How it Works
Here's the basic premise of rewards based crowdfunding: In exchange for money, your backers receive a reward. This can be some form of the product or some type of service your company offers.
The key to making a rewards based campaign work is building an emotional connection with your backers/customers. I'm not talking about weaving a tale of woe or heartbreak here.
What I mean is that your product needs to excite them and get them thinking that this really is something that they can use in their lives.
It all begins with getting into the heads of your customers and asking what is it that they're really looking for? Which of their needs does your project satisfy?
Does it make their lives more convenient? Does it add a splash of cool into their existence? Is your product going to change the way they perform certain tasks?
Get into their heads and figure out who they are. Your crowdfunding campaign is a marketing campaign in essence and you need to really nail this part of the process.
All of this is the basis on which your pitch is built.
Your pitch is the block of text that goes on your campaign's main page and introduces you and your product to the world. This is where you get to tell your customers why they need your product in their lives.
The anatomy of a successful pitch is quite simple. Here are the things, in no particular order, that your pitch should convey.
Who are you and why are you qualified to bring this solution into your customers' lives? Build your credibility by highlighting your qualifications or work experience. Perhaps you have a great team of people around you that bring serious firepower to the table?
Talk about them and show your audience why you're the best at this. A lot of small business owners get cold feet at the thought of this and suffer from impostor syndrome.
They feel 'There's no way we're the best in the world at this!' This is a perfectly normal thought so don't feel as if you're somehow failing at your task.
The trick is to get over your fear and assert yourself in a credible manner. If your product is great, your customers will back you up on this!
Your backers know they have a problem but they don't quite know how to put their fingers on it. You need to show them what the issue is and paint a picture of it.
If the problem is that they can't tie their shoe laces, don't state 'oh, tying shoe laces is such a drag!' Instead, show them why it's such a horrible problem.
It's cold and its raining, the kind of rain that freezes the moment it touches your skin. Their car just broke down and help is miles away. As they begin to get up and walk, they almost trip on their shoe laces! As if they needed another problem!
Alright, I'm exaggerating here. But you get the picture.
Forge an emotional bond and your audience is more likely to engage with you and actually do what you want them to do.
If you've told them what the problem is, show them how you have the solution and why it's the best thing ever!
Once again, the key here is to paint a compelling picture and to get them to buy into your vision. Use photos, videos, gifs, whatever you need to use, to leave them with a lasting impression.
Be honest at all times with regards to what you promise. Some people go overboard and promise the sky. They focus too much on the pitching and forget about the delivering.
Well, this will come back to haunt you.
At the end of the day, the campaigns that receive the highest amount of backing are ones that showcase a great product and where the creators are honest about their claims.
It's just good business!
These are the key to get right. Too many creators focus on the pitch and don't pay enough attention to the perks or rewards.
I mean, it's called reward based crowdfunding for a reason!
What will your backers receive in return for giving you cash? You're not giving them any equity so you'd better give them something amazing in return! The ideal number of reward tiers to have is seven.
Here are a few ideas that can help you brainstorm the perfect reward schemes:
Pre-orders: Whoever earns this will be amongst the first to receive a copy of your product.
Creative access: Your backers are willing to give you money because they're excited. Use this and make them a part of your product's creation process. Give them a look behind the scenes and invite them to beta test it and so on.
Souvenirs: Are there items from the creative process you can share with your backers? These are fantastic rewards if done right.
Recognition: A lot of successful campaigns offer some form of recognition to their first few backers. Perhaps a shout out on social media or some kinds of product edition in their name and so on. This can be priceless to a lot of people!
The last bit of the puzzle, but certainly not the least, is to really nail the marketing video. Explain your entire pitch in the video. You don't have to use the same language or format.
Campaigns that have clear and engaging videos always perform better. Videos are a great way to engage your audience so pay attention to the script you use.
It is best to hire the services of a professional who knows how to craft the best video scripts.
Rewards based crowdfunding is a great way to kick start your business in a safe manner. You don't have to worry about giving up equity and neither do you have to worry about shortfalls in cash flow.
Get your pitch right and you'll never have any problems with finding capital for launching new products or funding existing ones!