Crowdfunding can represent a large and diverse equity pool that harnesses the interest of existing and future customers to give you a leg up in return for some kind of “reward”. Alternately, it can be a term that represents the acquisition of debt sourced from individual private investors rather than a big, faceless bank or the sale of equity shares in your business in exchange for routine returns. Each of these formats for acquiring capital could prove a life-saver for a new company, but how do you know if crowdfunding is right for your business?
Alan Crabbe is one of the founders of Australian crowdfunding site Pozible. He says the easiest way to think about the different types of crowdfunding is like this: offer investors a perk or incentive to back your idea, or offer a stake in your business in return for their investment. In the industry, these two options are known as “reward” and “equity” crowdfunding, respectively.
“With rewards, there’s generally a patronage element,” he explains. “Your backing an individual or team to deliver a project or idea.
“With equity, the main motivation of backers is a potential profit from the investment.”
Sometimes a combination of the two is the way forward, but it can depend largely on your specific goals.
Chief executive of ReadyFundGo, Jill Storey, says that while crowdfunding can work for a variety of businesses, the first thing you need to ask yourself is “what outcomes am I trying to achieve?”
“Are you are startup? Do you have an idea for a new app that you are part way through designing? Do you have a new product or service? If you fall into this type of category then it is likely that a key to your success will be your ability to engage people with your story, get them to join you on your journey and want to follow you,” she says.
In that case, reward funding is probably the right fit for you. Reward-based crowdfunding can prove the best launch pad for these types of businesses because it serves the dual function of raising capital whilst also creating customer engagement, marketing buzz and growing natural advocates for your brand.
“If you are looking to buy a premises,” Storey suggests, “then it may be that you could do a combination of reward-based [funding] for customer engagement and market place lending – through something like SocietyOne – to help finance large premises.”
SocietyOne is one example of a peer-to-peer lending organization and a way to acquire debt through a crowdfunding model instead of heading for your local bank branch.
On the other hand, maybe you need to raise a large amount of capital for an operation that is not particularly consumer focused.
“Say that you are looking for $2 million to build a new processing plant in a B2B market,” Storey says, “and that you will not be looking to get lots of customer engagement then it could be that equity crowdfunding would be an option as an alternative to business angels.”
Right now, the equity crowdfunding market is occupied by sophisticated investors only and acquiring this kind of backing can require a lot of discussion with equity crowdfunding platforms to get their tick of approval. Once you’re vetted as a good investment by the platform then your investment opportunity is made available to prospective crowd investors.
Ultimately, you need to know exactly what you’re trying to achieve and tailor your involvement with crowdfunding sources accordingly. As Crabbe says: “Whether your launching a business or a new product line businesses and brands should consider crowdfunding as a marketing opportunity with a clear, authentic and transparent goal.”
Here’s a check list for determining whether crowdfunding is right for you.
Best suited to businesses that…
- Rely on word of mouth and social media channels to grow and succeed.
- Want or need to actively educate their users.
- Target early adopters.
- Have a higher purpose or mission (social enterprises).
- Are in-tune with the latest consumer trends.
- Are comfortable with technology.
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