What is crowdfunding?
Crowdfunding is a method of raising capital through the joint effort of friends, family, customers, and individual investors. This approach taps into the collective efforts of a large pool of individuals “primarily online via social media and crowdfunding platforms” and leverages their networks for greater reach and exposure.
Overview of crowdfunding
Crowdfunding is essentially the opposite of the conventional approach to business finance. Traditionally, if you wished to raise capital to start a business or launch a new product, you would need to pack up your business plan, market research, and prototypes, and then shop your idea around to a limited pool or wealthy individuals or institutions. These funding sources included:
- Angel investors
- Venture capital firms
This really limited your options to a few key players. Think of this fundraising approach as a funnel, with you and your pitch at the wide end and your audience of investors at the closed end. Fail to point that funnel at the right investor or firm at the right time, and that’s your time and money lost.
Crowdfunding platforms, on the other hand, turns that funnel on-end. By giving you, the entrepreneur, a single platform to build, showcase, and share your pitch resources, this approach dramatically streamlines the traditional model. Traditionally, you’d spend months sifting through your personal network, vetting potential investors, and spending your own time and money to get in front of them. With crowdfunding, it’s much easier for you to get your opportunity in front of more interested parties and give them more ways to help grow your business, from investing thousands in exchange for equity to contributing funds in exchange for a first-run product or other reward.
Crowdfunding verses traditional business financing
Benefits of Crowdfunding
By tapping into a wider investor pool to enjoying more flexible fundraising options, there are a number of benefits to crowdfunding over traditional methods. Here are just a few of the many possible advantages.
Presentation – By creating a crowdfunding campaign, you go through the invaluable process of looking at your business from the top level its history, traction, offerings, addressable market, value proposition, and more and boiling it down into a polished, easily digestible package.
Reach – By using a crowdfunding platform, you have access to thousands of accredited investors who can see, interact with, and share your fundraising campaign.
PR & Marketing – From launch to close, you can share and promote your campaign through social media, email newsletters, and other online marketing tactics. As you and other media outlets cover the progress of your fundraise, you can double down by steering traffic to your website and other company resources.
Validation of Concept – Presenting your concept or business to the masses affords an excellent opportunity to validate and refine your offering. As potential investors begin to express interest and ask questions, you’ll quickly see if there’s something missing that would make them more likely to buy in.
Efficiency– One of the best things about online crowdfunding is its ability to centralize and streamline your fundraising efforts. By building a single, complete profile to which you can funnel all your prospects and potential investors, you eliminate the need to pursue each of them individually
Types of Crowdfunding
Just like there are many different kinds of capital round raises for businesses in all stages of growth, there are a variety of crowdfunding types. The crowdfunding method depends on the type of product or service you offer and your goals for growth.
The 3 primary types are:
Broadly speaking, you can think of any crowdfunding campaign in which there is no financial return to the investors or contributors as donation-based crowdfunding. Common donation-based crowdfunding initiatives include:
- Fundraising for disaster relief
- Medical bills
Rewards-based crowdfunding involves individuals contributing to your business in exchange for a “reward,” typically a form of the product or service your company offers. Even though this method offers sponsors a reward, it’s still generally considered a subset of donation-based crowdfunding since there is no financial or equity return.
Unlike the donation-based and rewards-based methods, equity-based crowdfunding allows contributors to become part-owners of your company by trading capital for equity shares. As equity owners, your contributors receive a financial return on their investment and ultimately receive a share of the profits in the form of a dividend or distribution.
About the Author
Thank you for reading this article. The author, James Ndambiri is an avid Business Advisor and Consultant: A Tax Surgeon, Proficient Accountant, Skilled Auditor, a Guru in Financial and Investment management, Expert in Business Strategy Formulation, Business Transformation Wizard, Family Business Advisor, Lecturer, Business Coach and a Family Man.
James is the Founder, Team Leader, CEO & Managing Partner of MNC Consulting Group. MNC Consulting Group is your most trusted and respected professional business consulting firm recognized by our clients for delivering excellent business advisory and consulting services that create value to their ventures. With our focus set on value addition, we offer our clients the highest quality professional services in Accounting, Audit and assurance, Tax, Business Transformation, Investments and Financial Advisory, Family Business Advisory, Company Secretarial Services and Property Management that address their business needs through attracting, recruiting and retaining knowledgeable and passionate professionals who enable us to deliver superior results while contributing positively to the community in which we live and work.
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