Crowdfunding Best Practices

What is investment crowdfunding?

Jules

by Jules

On 2018 M12 12

by Jules

When it comes to accessing capital for your small business, the traditional way is to apply for a loan from a bank or financial institutions.

However, the challenge is that you have to meet the certain legal and financial criteria to qualify for a loan. Many small business owners don’t have enough assets to put down as collateral to get the loan they want.

In such cases, crowdfunding can be a great alternative.

The beauty of crowdfunding is that it democratizes the process of raising money for your business in its early stage, or to expand your current small business.

The Internet is the perfect place to get access to capital, as you basically have the world at your fingertips. With the right crowdfunding platform and persuasive marketing, you can convince strangers to believe in your cause and donate funds.

There are different types of crowdfunding to consider:

Reward-based crowdfunding

With this type of crowdfunding, donors are rewarded with services or products that are related to the crowdfunding project. The value of such service or product is mostly determined by the amount donated.

Popular platforms for this type of crowdfunding are Fundable, Kickstarter, and Indiegogo.

Donations-based crowdfunding

This type of crowdfunding purely relies on donation. There are no rewards or equity involved against the funds raised. It is purely charity based and is mostly used for disaster relief, NGOs, paying off expensive medical bills, and other non-profit organizations.

Equity-based crowdfunding

Equity-based, or investment crowdfunding, involves getting equity shares in the company, in return for the capital investment. If you are looking for a large  crowdfunding investment, this might be a choice to consider.

Let's discuss investment crowdfunding in more detail, shall we?

Investment crowdfunding - what you need to know

In the past, investing in unknown business startups used to be something that only venture capitalists and wealthy investors had the resources to do.

Thanks to the Internet and the availability of trustworthy platforms, investment crowdfunding is an option that is now accessible to smaller investors who are hoping they can invest in the next unicorn startup.

In equity crowdfunding, the investors get a percentage of shares of the company relative to the amount they invested. That means that they become a partial owner of the company. They will share mutual profit and loss when the company does well, or face loss respectively.

While you can do equity crowdfunding in Kickstarter and Indiegogo, other popular platforms include AngelList, CircleUp, and EquityNet.

The risks and rewards of equity crowdfunding

As with any business plan, it's always good to evaluate the risks and rewards of equity crowdfunding before you decide it's the right type of funding for you.

Risks:

  • If your company is unsuccessful in getting funds raised, you might end up jeopardizing not just your public image, but the trust and confidence of your investors and supporters.
  • Another risk is that your company shares will be distributed among many shareholders; managing and coordinating them can be a tough task. Be sure that you are up for the maintenance involved.
  • Equity crowdfunding is viewed as extremely risky for many investors. If you want serious and experienced investors to put money in your business, gain trust by being prepared, knowing your business inside and out, and having a clear plan on how funds will be used.

Rewards:

  • If successful, your business can get good press coverage and raise public awareness
  • You will have financial supporters who can put in a good word for you, effectively being a part of your PR and marketing plan
  • You can learn a lot and tap into your investors' business networks for additional assistance
  • You can get an immediate market response about your business. A good market report that shows how people liked your product or service will get more serious investors interested in putting their money and trust into your business.

Step-by-step guide for a successful crowdfunding campaign

Interested in running an equity crowdfunding campaign? Consider these tips:

  • Do your due diligence - come up with a well-researched plan that details what you need funds for, how much venture capital you need to raise, and how you will allocate these funds, and how long you expect these funds to last.
  • Determine the interest rate of the funds you need to return, or the percentage of equity share you are willing to give.
  • Communicate your intent clearly. Potential investors should be able to understand why you need the money, how long your runway is, and your ability to get results.
  • To entice as many investors as you can, use all conventional and online methods to spread the word that you are launching your campaign - social media, online marketing campaigns, emails, and local media can help get investors' attention.
  • Once you have raised the money, keep in touch with your investors. Give them status reports on how their investment is going so you can foster transparency and trust.

Conclusion

Investment crowdfunding is a great alternative to getting funding for your business without having to go through the lengthy process of applying for a loan from a bank or financial institution.

If you are planning to start a new business and have no collateral to give to the bank, yet you are confident that your idea is worth investing in, then equity crowdfunding could potentially be an option for you.