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What is crowdfunding?

Crowdfunding has changed the way people raise money for a business, project or charitable cause. Online platforms like Kickstarter, Indiegogo and Crowdfunder give you access to millions of people looking to donate and invest.

How does crowdfunding work?

Crowdfunding is essentially the opposite of the mainstream approach to business finance. It flips the typical funding funnel on its head. Giving entrepreneurs a single platform to build, showcase and pitch to people.

Crowdfunding websites allow companies to advertise their campaigns, it’s usually a start-up company, product or service who are looking for peer-to-peer investments. Sometimes the companies will offer, shares and rewards, for people who are willing to provide some level of funding. People can browse through thousands on new companies and products, and if one catches their eye – they’ll be able to invest and donate.

Platforms allow you to set a financial goal for your campaign, so for example, if you need to raise £1m – you’ll set this is your goal. You’ll have a period to try to achieve this, it can be anywhere from 30-60 days. There’s also all-or-nothing models which return funds to investors if the goal is not met.

You are also able to implement numerous stages of funding if you want to funnel your investments through different parts or versions of your service or product.

Benefits of crowdfunding

Reach – Crowdfunding platforms give you access to thousands, if not millions of investors looking to expand their portfolio. The best part is anyone can invest, so you’ll have a mixed bag of accredited investors and the general public.

PR & Marketing – Crowdfunding opens up opportunities to market through social media. You can promote your campaign through multiple channels. This opens up so many more doors than traditional mainstream business finance.

Efficient – Online crowdfunding is done from a single platform, so you’re able to centralise and streamline your fundraising efforts. If you’ve got an update for investors and potential investors – you’ll be able to share it easily with a few clicks.

Types of crowdfunding

There are 3 main types of crowdfunding, donation-based, rewards-based and equity crowdfunding. 

Donation-based crowdfunding:

This option has no financial return for the investors. Donation-based crowdfunding is used for charities, non-profit organizations and disaster relief. This won’t typically be used for businesses looking to gain investments.

Rewards-based crowdfunding:

This option offers the investors a reward, typically it will be either the product or service the company is offering. A good example of this is the Pebble Smartwatch. It was originally posted on Kickstarter and offered investors of a certain threshold, to receive a physical version of the smartwatch. This enticed a lot of people to part with their money and paved the way for a lot of businesses to follow this method.

It can also be seen as a variation of donation-based crowdfunding, as the investors are not receiving any financial or equity return. It’s still a very popular option as it allows businesses to incentivise without incurring much extra expense or giving away any shares.

Equity crowdfunding:

Equity crowdfunding allows people to become part-owners, shareholders of the company in return for their investments. This has become the focal point of crowdfunding in recent years. More and more businesses with great potential and ideas have discovered they can achieve their goals and get their start-ups up and running.

It offers investors more for their money, so to speak. However, it does require more research into the product/service and industry, as there is capital at risk.

Important things to remember

Crowdfunding isn’t automatic, you won’t just be able to create a profile for your business and watch the investments roll in. You need to brand your business and showcase what you can really and truly offer. You need to have a strategery for your business in place. You need to have a marketing plan in place. That’s when potential investors will consider your business as a promising investment.

Transparency is key. Remember that crowdfunding is still a form of getting finance for your business. Even though, it may not be through traditional channels. E.g the bank. Investors will want to know everything about the company, and that means everything. If you look like you’re even trying to hide something – even if it isn’t something bad, you’ll put off potential investors.

Remember, crowdfunding isn’t a guaranteed investment. Even though you may believe in your product/service, others may not feel the same way. It’s your job to win them over. It’s like one big pitch to investors all around the world.

Ways we’ve seen companies use crowdfunding

Many start-ups fail and that’s the harsh reality. Some handful of companies make it out the crowdfunding stage, let alone run for more than 5 years. Some of the failed start-ups might have even had potential but unfortunately, they couldn’t present themselves properly, this meant they couldn’t attract investors.

Crowdfunding is great to get your business to a better position with the support of the public. However, you still need capital to attract investors. Before you even consider crowdfunding, you as a business need to tick some boxes. These are:

Branding – Not just a logo, your brand needs to have meaning, values and look good.

Website – Where can investors go to find out more about the products and services?

Social media presence – This has become more and more important and is a great place to see what others are saying about the brand and create a buzz around your brand.

PR – Are you and your brand following good practices to ensure you appear approachable?

If you tick all the above boxes, well done, you have automatically doubled your chances of achieving a successful crowdfunding campaign. You appear more professional, trustworthy and in general, look like you know what you’re doing and know what you stand for.

At the end of the day, if you don’t invest in your brand, don’t expect others to come along and do the job, you are meant to do, for you. No one can look to invest in a brand where the person behind it hasn’t at least put some effort into doing so.

If you need to discuss crowdfunding further or need to better position your brand, to increase the likelihood of a successful crowdfunding campaign. Feel free to get in touch with us at hello@theiirthcompany.com and one of our team will get back to you shortly.

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Mythbusters: Social edition
Mythbusters: Design edition