18 Oct Crowdfunding – A new frontier
You’ve had a great idea, one that’s destined to change the lives of the masses. From the very beginning, your research indicates the market is yours for the taking, now you’re eager to take the next step.
Before you roll the dice – ask yourself, “what is my next move?” Sadly, there’s no definite answer to that question…yet! However, your next move should be based around your objectives and how far along the process of innovation you are. These two factors are extremely important when choosing which route to take.
Bringing a new product to market is expensive and time-consuming. Paying for market research, concept work, prototyping and tooling quickly adds up, further highlighting the importance of a financial plan and solid financial backing.
There are several routes one should consider when seeking finances for a project. Bank loans, personal finance, angel investors and crowdfunding are all feasible options. However, each method comes with its very own set of pro’s and con’s. It’s important to note that one source may have more relevance in the initial stages of the innovation process whilst others may be more relevant in the final stages.
Crowdfunding is a relatively new concept in the realm of alternative finance, it’s innovate, effective and fun. In this article, we will unravel the mystery and confusion surrounding this new phenomenon, and outline how you can get the most out of your campaign.
What is crowdfunding and which form is right for me?
Crowdfunding is a method of raising finances whereby a large online community provides a small amount of money each in which contribute to the success of a shared goal. The internet has allowed the concept to blossom into a global £25.8 billion market.
There isn’t a ‘one size fits all’ approach to crowd funding. There are variations to crowdfunding, donation crowdfunding, debt crowdfunding, and equity crowdfunding.
Donation crowdfunding: Here, people invest because they believe in the cause. Sometimes backers will be rewarded with tokens that increase in prestige as the size of the donation increases. Often, backers may not receive a reward for their donation, as usually they have a personal or social motive for backing the cause. Rewards in many forms – free or discounted product; prizes, or even just a ‘e-hug’ to say thank you. Often ongoing updates on progress
Debt crowdfunding: AKA ‘P2P lending’ or ‘loan based lending.’ Here investors will receive their money back with interest. It’s an effective way to lend money whilst bypassing the banks. Here the reward is financial, however an investor also benefits from contributing to an idea they believe in. Debt crowdfunding does pose a financial risk to the lender.
Equity crowdfunding: This option provides backers with equity in a business. Money is invested in exchange for shares in a business or a stake within a particular project. Most risk / potential reward. You, the owner will be giving up some of your ownership in the idea; it can be very good if investors also bring their talents, experience, contacts etc to the party. With equity crowdfunding, you may not be truly in control of who your fellow shareholders may be – think about how that will feel like a year or five years on from now.
Whichever form chosen, aim to create a family who can be a source of inspiration, the seeds of your future market, and generally, a valuable resource for lots of things apart from funds.
Finding your how and why
You need to know which goal you’re aiming for to play a blinder.
- Why are you asking for money? What you’re asking for must be a ‘legitimate ask’ beside simply asking for money. Your potential backers want to know what they’re putting their money towards and feel that they are part of something big.
- Once you have a solid idea of what your objective is, you must be completely transparent about what the money will do. Justify and support this with research and evidence that will keep your backers interested – or spark more interest!
- Next, present your objectives. Use eye-catching visuals, graphs, animations and some CAD renders of your product. This helps engage your audience and make you more memorable. The beauty of creating a show stopping presentation is it encourages people to share with more potential backers.
- Be very clear what backers should expect – timing, what could go wrong, as well as the opportunity.
- Sell and enthuse by all means, but avoid any misleading statements. Having your plan checked by a ‘neutral’ person is a good idea
- If you’re raising money to put your product through full scale production, you could include quotations from the factory. Transparency here is key.
Here you can see an image taken from a crowdfunding campaign created by our client, TravelShades:
Below is an excerpt from ‘The Portland Press’ explaining why they were asking for their finances. This is a fantastic example of a start-up using crowd funding to initiate the production of a new product.
“Why do you need $50,000 for this project?
We originally were shooting for $80,000, because that’s what we needed to place an order of 1000 presses. 1000 presses was about the point where we could get our manufacturing costs down to a reasonable level. After the campaign started, we went back to our suppliers to see if we could reduce the minimum order quantity, and still keep the price down to a level where we wouldn’t lose money. We were able to reduce the minimum order quantity to 500 units, and still keep the costs at a reasonable level, which is why, with the approval of Crowd Supply, we were able to lower the goal to $50,000.”
- Research, research, and plan. There’s a lot of information out there regarding Crowdfunding, some useful and some misleading. Each crowdfunding site has its own niche, and offers users different benefits. In part 2 of our crowdfunding series, we will be examining in-depth what type of campaigns certain websites accept.
Below are some useful resources from ‘Ted talks’ and ‘Crowd supply.’ They cover the bare basics of crowdfunding and touch upon manufacture, suppliers and even outline the main points from a post campaign checklist.
Ted talks | Crowdfunding 101 – https://www.youtube.com/watch?v=YY5EfaF61hI&t=33s
Crowd Supply | manufacture, suppliers and post campaign essentials – https://blog.crowdsupply.com/2017/02/08/whats-new-in-the-crowd-supply-guide/