If you’re planning to grow your business there is a good chance you’ve considered running a crowdfund. Startups, entrepreneurs and small businesses use crowdfunding to launch a product to a wide audience. More established businesses use crowdfunding as a way to generate capital by offering equity in their company in exchange for much needed financial liquidity.
You read success stories about campaigns in the newspapers, which only adds to the hype (and we know from experience that it can work). HAB Housing, whose crowdfunding campaign we helped run, raised £2.42 million this way through a mini-bond. Go the next stage up and you’re bound to remember stories, like Occulus Rift, where crowdfunding changed the direction of a business.
Yet while crowdfunding could be a great way for you to grow your business, there are things you need to consider. In the following paragraphs I’ll guide you through the different crowdfunding options. I’ll also cover the risks of crowdfunding. Hopefully at the end of the article you will be in a better position to decide if crowdfunding is the right strategy for your business.
The 4 Types of Crowdfunding
1. Rewards-based crowdfunding
There are four main types of crowdfunding. The one with the largest reach is rewards-based crowdfunding. This is where a consumer buys an exciting new product (like an Occulus Rift). A rewards-based crowdfunding campaign will normally have a tiered pricing plan. The general way this works is the more money you donate the more extras you receive.
Most successful rewards based crowdfunding campaigns have one of two things in common. The consumer is either getting:
- The product below the “manufacturer’s suggested retail price” (or to put it another way – a bargain)
- Exclusive access to the product before general release
A rewards-based crowdfunding strategy is great for entrepreneurs and product creators who are bringing new technology to market. One of the risks for new companies with this type of crowdfunding is that if your offer is wildly successful you may struggle to hit production targets. We’ll cover more about this in the risks and rewards section at the end.
2. Equity Crowdfunding
Equity crowdfunding involves the company giving away part of the company in exchange for a cash investment. This is the crowdfunding equivalent of Dragon’s Den or Shark Tank. This model is only suitable for established businesses with a clear business plan.
Preparing for an equity crowdfund is a lot harder than a rewards based crowdfund. There is normally a vetting process by the crowdfunding platform, where applicants have to submit information about their company directors and accounts. Only after this paperwork has been approved, which normally take a month or more, can you prepare for your crowdfund.
These rules are in place for a reason. The initial investment for an equity crowdfunding are normally quite high. While an investment in a rewards-based crowdfund might start at $10, the initial investment for equity crowdfund often starts at $1,000 with a minimum target of $300,000. Many businesses use equity crowdfunding as a way to generate interest from venture capitalists.
Debt-crowdfunding is where a company asks lenders to provide a loan to a company based on a set interest rate. Rather than getting a reward the lender get a set return on their investment. With this type of crowdfunding the loans are often sold as mini-bonds. The success of mini-bond fundraising is normally linked to the returns offered by the investor alongside the track record of success (either of the business or of the board).
Raising money through a mini-bond has certain advantages over a bank loan. For example you might be able to raise more capital with a mini-bond than through a bank loan, especially if the mini-bond is over-subscribed. While this is a good thing, it raises obvious issues. We will cover these later when we discuss if you should crowdfund for your business.
Donation crowdfunding is pretty self explanatory. Rather than receiving anything in return, donors give their money to a good cause or a charity. Many charities use donation crowdfunding to raise money for specific projects, like building a school. There are also a lot of personal donation-crowdfunding campaigns. You’ve probably seen some donation crowdfunding stories in your fb timeline.
The Problems With Crowdfunding
Once you’ve decided on which type of crowdfunding is right for your business you need to consider the risks. There are many, but below you’ll find a shortlist of common problems that businesses trying to run a crowdfunding campaign have. Unsurprisingly this starts with actually preparing for the crowdfund.
Running a Crowdfund is a Lot of Work
There are a lot of moving parts in a successful crowdfund. Ideally you want to grow a core audience of people interested in what you have to offer. To do this you could run competitions, do market research, generate exposure in the press and through influencers for example. Then there is all the marketing material you need for the crowdfund; there are the sales pages, the pitch deck, the content for social media, the list goes on.
Preparing all of these things is a lot of work and can leave your marketing team stretched thin. If you’ve never ran a crowdfund before then I suggest you read the guide that Ella wrote; how to run a successful crowdfunding campaign. It provides some useful tips and insights that you’ll find useful.
Be Careful With The Extras You Offer
One of the biggest mistakes we see businesses make, especially small businesses and entrepreneurs, are the rewards they offer. Often these rewards are added in the heat of the moment during a successful crowdfunding campaign. We call these types of rewards Santas Wishlist. The problem with Santas Wishlist is it can be hard to actually deliver on all your promises.
This can create all types of problems for your business. On top of delivering your actual product, which can be hard enough, you suddenly need to create additional products for your larger donors. If it’s a physical product this might mean finding a factory to produce the goods. This raises potential issues of quality control etc. The problem is many people don’t think about these things in the heat of the moment. Noah Dentzel, the CEO of NOMAD did an interesting interview that covers this.
Always Communicate Clearly
Another thing you need to keep on top of after your crowdfunding is how you communicate to your audience. In your crowdfunding pitch you set clear targets that investors expect you to deliver on. If you fail to hit those targets for whatever reason that consumer confidence will be dented. At best you might get a few grumbling customers, at worst you could end up with a PR disaster on your hands.
So whatever happens, at the end of your crowdfunding campaign send a thank you note to all your investors that includes an expected timeline for their good or a return on their investment. If there’s a lengthy delivery time make sure to update your audience through social media or periodic email updates. This will help generate trust with your audience.
If, for whatever reason, you run into any problems make sure to communicate those issues clearly to your customers. Don’t rush off an email straight away though, take time and discuss your strategy with your team. Then when you have discussed the issue send an update outlining the problem you faced and the solution you are offering. Make sure that if you send a new timeline to set realistic – definitely not optimistic – dates. If you don’t hit those dates you will only have more problems…
Wrapping it Up
Hopefully this article will have provided some useful information that will help you decide what type of crowdfund is right for your business and elaborated on some of the risks and rewards of crowdfunding. With the right strategy in place crowdfunding is a proven way to grow your business. Established business often use crowdfunding to grow the company by selling equity or raising money through mini-bonds. Crowdfunding is also a great way to validate the market demand for a product and expand your customer base.
If you don’t want to go it alone, don’t worry. Our crowdfunding package is here to ensure your campaign runs as smoothly as possible. We offer bespoke support to suit your needs, whether you’re looking for £100,000 or £1m. Get in touch today and find out how we can help you smash your target.