There are many ways you can tap into capital to fuel your company needs; but not all sources are willing or accessible to you.
It is really an issue of the level of risk your company possesses at any given time.
For example, in the beginning you will likely self-fund your company with some savings. As your capital needs grow you might turn to family and friends to support you in funding your passion.
As your company grows some more and the capital needs grow as well you might turn to Angel investors. These are somewhat wealthy people that perhaps you do not know personally but will take a chance and fund you.
Next Venture Capitalists and Institutional funds like Banks these groups might look at your company but only when you have a sale-able product, you have customers and you have an emerging business. They are generally very picky about the companies they take on because they are representing Other People’s Money (OPM) so they have to be very careful.
This where Crowdfunding has emerged.
For companies that do not fit the mold for formal traditional sources of capital such as Angel investors, Banks or VC’s, Crowdfunding taps into wallets of Family, Friend and more importantly Fans.
Fans are the people that don’t know you personally but like what you are doing and want to support you.
Crowdfunding has been referred to as the democratization of capital meaning it directly connects people with money that are not necessarily wealthy – with people who need it. Crowdfunding taps into people’s spare dollars, pounds or pesos and is reinventing finance 10-$1000 at a time.
How equity Crowdfunding differs from reward-based Crowdfunding
First the audience types are different. In reward based Crowdfunding the audience is called a backer or a supporter; whereas in equity CF the audience are called investors.
Secondly, the form of consideration provided is different. A backer receives rewards/incentive or experiences while an investor receive shares or equity in exchange for money.
The main campaign attraction of a campaign for a backer relates to attributes focused on “social good”.
An investor on the other hand is attracted to a campaign if it demonstrates promise and potential that is aligned to the investor’s risk and interest profiles.
The motivation of each audience is also different. A backer is motivated by emotional and contributory factors while an investor is intent on more rational thinking, focused on return on investment objectives usually in double digit multiples.
Finally, marketing an equity crowdfunding campaign has more restrictions placed upon it by securities regulators. This means entrepreneurs must be careful as to how and what they can say about their business and plans. A reward based campaign on the other hand is monitored but does not have such stringent oversight restrictions.
These differences affect how an equity Crowdfunding campaign is marketed.
So what are the key benefits of Crowdfunding specifically Reward-based Crowdfunding?
Money is the obvious answer but there are several other benefits that some people don’t realize.
It can help in test marketing your idea or concept
Crowdfunding can be an inexpensive way of doing market research. If you launch a campaign and no one funds you that is a good indicator that you might not have a product or offering people will buy. You may have paved the cow path that no one is interested in.
It will help you gauge demand
Similar to the first point above but in this instance you will be in direct contact with the people engaged with your campaign. You can see how many products are purchased ahead of your commercialization plans, you can test your forecast assumptions, and you can judge how profitable your company might become.
Establish go/no go decisions
For example if a campaign is unsuccessful you may determine that the demand is too low to make a viable business and decide to go back to the drawing board or if you see demand is higher than anticipated decide to vigorously pursue commercialization plans.
It’s also excellent in helping to gather customer data on who is really interested
As your campaign proceeds you are in constant contact with your backers. You have a chance to ask them questions about what colours they might like, what shapes they prefer, what preferences they have and so on. This is rich feedback that will make your product or offering that much better.
It creates buzz and a promotional platform for your company
I have worked with numerous start-ups, small businesses and emerging companies and I have to say that creating buzz or marketing programs for newer companies is something they find difficult to do.
However, it is impossible to avoid not having a solid marketing campaign for your Crowdfunding project. This fact alone is a valuable way for small businesses to get the word out about what they are doing through a professionally planned marketing program.
It may also cause serendipity (you just never know what will turn up)
If you are getting the word out about your business to bloggers, your base of supporters, you are using social media effectively, doing email blasts about what you are doing – with all this communication you just never know who might be listening that may become a partner, investors, a big customer or surface other opportunities that would not otherwise reveal themselves.
Finally it’s Non-dilutive
Crowdfunding particularly reward and lending based types are non-dilutive meaning you do not have to give up ownership of your company in exchange for capital. You do not sell shares in your company to funders. That is a very important thing for entrepreneurs that do not want to give up control or a reduced ownership % of their business.