crowdfunding advantages

Is crowdfunding the best option for raising capital?

crowdfunding advantages

If you’re considering launching a new product, solution or next-gen business idea, you might have heard that crowdfunding could be a unique way to garner attention and raise capital. But is crowdfunding the most effective way to get you the necessary funds, and are there potential shortcomings that you should know about in advance?

How crowdfunding works

 

Put plainly, crowdfunding is a way to collect a bunch of financial contributions instead of looking for just one large investment — commonly achieved via websites such as Kickstarter or Indiegogo. These sites often highlight innovative ideas that are brand new to the market — launching to a wider audience and getting exposure that would have been time-consuming and much more costly through traditional methods.

Most crowdfunding platforms use a rewards model, allowing would-be entrepreneurs to provide incentives in order to get the crowd to fund their concept.

The most common incentive is providing the product or service when it’s ready, without additional charge. Some entrepreneurs utilize a tiered structure, where a small contribution preorders the product while a larger one garners additional perks, such as a special edition item or even a chance to collaborate with the developers on its final design. For early adopter consumers, getting in on the ground floor for a new product would have a great appeal.

Once the incentive structure is in place, most sites set a time limit on the idea’s profile. Nobody wants to look through abandoned ideas, so the time limit ensures that investors are only seeing active projects whenever they look for something to back.

That said, not all crowdfunding sites require a rewards model be in place.

GoFundMe is one example of a popular crowdfunding platform with no incentive structure. Instead, backers pledge their support for causes that they believe in. Patreon is another platform that allows artists, musicians and other content creators to solicit monthly contributions to support their work, rather than a specific project. There are also a few sites that allow investors to purchase a tiny equity stake in the idea they are backing, turning the process into a more traditional investment.

Advantages of crowdfunding over other financing

crowdfunding

The biggest advantage of crowdfunding is that entrepreneurs are generally allowed to hold on to their equity. Backers get a product in exchange for their contribution, leaving full control of the idea to the original developer. If the idea ends up being worth millions, this can prove to be very significant. It also allows entrepreneurs to maintain unquestioned control over their company’s day-to-day operations.

Crowdfunding also creates an instant customer base with a vested interest in a given concept. Backers pick projects to support because they think they’re cool — meaning that they want to have it first. They’ll often go to great lengths to help promote the idea to their friends, family and anyone else who might listen on social media. After all, if an idea fails to resonate with the masses the way backers expected, they lose this cool factor.

Consumers are increasingly looking for products online, so an active digital presence can really help grow your brand, build awareness, positive sentiment and make consumers more likely to choose you in the future. And since crowdfunding is generally conducted entirely online, entrepreneurs can foster a meaningful relationship with their audience via multiple channels in creative ways that don’t have to cost an arm and a leg.

Disadvantages of crowdfunding over other financing

The time limit is essential for crowdfunding platforms to maintain a fresh inventory of ideas, but many of the downsides are tied to this restriction. Most platforms utilize an ‘all or nothing’ model that prevents entrepreneurs from keeping any of the money they collect if they fail to reach their stated goal. Failing to meet your goals can turn the entire endeavor into a costly waste of time.

Underestimating the capital needed can prove even more disastrous. Once an entrepreneur keeps a backer’s money, they are legally and ethically obligated to provide whatever incentive was promised in exchange. If they’re unable to deliver, the resulting litigation is likely to prevent the company from ever getting off the ground.

Some entrepreneurs see crowdfunding as a shortcut, but be warned it will take just as much (or more) preparation, business planning and effort to convince your backers. The digital-savvy and hyper-selective audiences demand a complete business plan detailing what their money will be used for regardless of how much they invest.

The online component of crowdfunding also requires business owners to live online and build support for the duration of the campaign, leaving little time for other duties. There are professional agencies that help manage crowdfunding campaigns, but using them adds to the costs that crowdfunding platforms already deduct from the money raised.

Not for everyone

Crowdfunding is a relatively new and potentially thrilling way for would-be entrepreneurs to raise money, but it’s not right for everybody.

Before you get started, look at all your funding options to determine if you have the right resources in place (time, money, expertise) to venture into a crowdfunding model. Talk to other business owners who have had successful (or unsuccessful) online campaigns and ask them for tips on getting started. Investigate the various crowdfunding sites and learn which ones will give you the appropriate platform to connect with your audience.

This process is just a starting point, and it can get a lot more complicated — so it pays to do your homework before jumping in headfirst. Once you’ve made an initial assessment, it’s time to get deeper into your analysis to choose a platform, crunch numbers and treat the crowdfunding just as seriously as you would any other business lending opportunity.

startup mistakes

10 Avoidable Mistakes That Could Doom Your Startup

startup mistakes

90% of startups fail. It’s a new world of business, and only the strongest new companies will survive. So how do you avoid startup doom?

Sometimes failure comes down to sheer bad luck or influences beyond an entrepreneur’s control, but in many cases, it can come down to the same simple mistakes that companies make time and time again.

Here are 10 common errors to avoid if you want your business to last the distance.

1. Inadequate Market Research

It doesn’t matter how remarkable you think your product is if the market doesn’t agree with you. Very few startups offer an innovation that can truly revolutionize a space, so before you spend significant money on development and marketing, be sure your market research is up to scratch. Don’t waste time and resources on a white elephant with no demand.

2. Insufficient Startup Funding

All startups need to have a realistic plan for how they’ll operate until revenue starts to flow reliably. Almost always, this means having sufficient initial funding in place to see you through the first lean months or years, whether that’s through your own investment or via a third party funding partner.

3. Unsuitable Partner Choice

As vital as funding is, it’s a mistake to go into business with a partner just because of the capital they can inject. For long-term success, you also need to have a matching vision, common aims, and complementary skill sets.

4. Poor Customer Care

If gaining and retaining customers isn’t your number one aim, your company will struggle to develop any momentum. Providing great customer care and an excellent experience is a non-negotiable requirement for success.

5. Ignoring Revenue Needs

Especially in tech sectors, it seems fashionable for startups to focus on building a product range and a user base while leaving revenue worries until later. This rarely works out well. If you don’t have a strong, actionable idea about how you’ll generate revenue as you grow, gaining more customers could actually be a fast route to failure as your costs quickly outstrip your income.

6. Poor Budget Control

Never let costs get out of control in your quest for growth. Losing sight of the importance of healthy cash flow is a big mistake — no matter how many other metrics you use to measure success. Unless you have investors with extremely deep pockets (who aren’t focused on ROI), you need to keep a steady eye on the bottom line.

7. Getting Overly Enthusiastic

Hopefully, your startup will be a rapid success, but it’s all too common for entrepreneurs to become too enthusiastic at the first signs of substantial profit. It’s important to keep a level head, press on with your strategy, and continue making sensible business decisions rather than letting that enthusiasm get the better of you.

8. Poor Hiring or Collaboration

There is a common image of a lone wolf or maverick entrepreneur, but the truth is that any successful business relies on hiring high-quality staff and working with skilled third parties when necessary. Trying to do everything yourself isn’t the best use of your entrepreneurial talents.

On the flip side, if it’s not working out with a staff member or third party relationship, you should have no qualms about rectifying the situation before too much damage is done.

9. Fear of Delegation

Once you have high-caliber staff in place, you need to trust them to do their jobs. Many driven entrepreneurs struggle with delegation, but it’s essential for serious growth. If you constantly micromanage your staff, expansion is limited by the number of hours you can put in personally.

10. Lack of IP Protection

Lastly, in the rush for growth, many businesses fail to properly protect their intellectual property. Patents, trademarks and copyrights are all essential. If others can replicate the core aspects of your business without any legal barriers, you can be sure that someone with deeper pockets or a larger existing customer base will eventually move into your space.

 

If you have the entrepreneurial frame of mind and a winning business idea, it can be tempting to go full throttle towards growth and success. However, it’s vital to learn from the mistakes of others and take a little care along the way. Avoid these common errors and you’ll stand a much better chance of being in business for the long haul.

Diagram

Recent Fundings – October 2018