What is crowdfunding?

Crowdfunding has grown hugely in popularity over the last few years and is a great option to consider if you are looking for funding for your small business.
It involves asking a large number of people to each loan a small amount of money, thus achieving your financial goal through a number of small amounts rather than one large one.

Crowdfunding sites

There are several ways in which your crowdfunding could work with regards to what your investors get back in return for their financial input.

Donation crowdfunding

As the name suggests, in this instance, people will donate money simply because they believe in a cause and want to see it succeed. They will expect nothing in return for their financial donation.

Example platforms for donation crowdfunding:

JustGiving
Kickstarter

Reward crowdfunding

Here, the business will offer some sort of benefit to those who donate. This has been quite a common tactic in the gaming industry where people will help to fund the creation of a new game and in return they will get a copy of it, perhaps before it is released to the general market. Perhaps they will just be named and thanked in some way. Whatever the reward, it won’t necessarily have any relation to the amount donated.

Example platforms for reward crowdfunding:

Kickstarter
Indiegogo

Debt crowdfunding

This relates most closely to the traditional loan in that investors will receive their money back with interest. This is also called Peer to Peer lending.

Example platforms for debt crowdfunding:

Funding Circle
The Lending Club

Equity crowdfunding

In this instance, investors receive a shares in the business itself in return for their financial input. This can also be referred to as Seed Capital.

Example platforms for equity crowdfunding:

CrowdCube
Seedrs

How to launch a successful crowdfunding campaign

Whichever type of crowdfunding you decide to go for, your first priority will be to get as many people as possible to actually agree to invest! You will therefore need to launch a crowdfunding campaign. Here are some tips to help you make sure that your campaign is successful:

Create a compelling story
People tend to decide to invest or not depending on emotion. They are more likely to invest if they know the background to your business and why you are asking for investment.

Social media
A strong social media strategy is a key. This is how you will spread word of mouth and gain support for your campaign.

Produce a high quality video

This is the heart of your campaign and where it will come to life so make sure you don’t cut corners.

A professional looking website

While a website isn’t vital, it will help to give you more credibility by showing potential investors that you are a legitimate and worthy business to work with.

Keep communicating with people

Don’t forget the people who have invested already. They will be keen to know your progress!

Is crowdfunding a good idea?

Before jumping into your crowdfunding campaign, there are a few things to consider which may help you to decide whether it is a good idea for your business.

Advantages

  • Crowdfunding can mean that you pay back less of the investment than you would through more traditional forms of loan.
  • Your crowdfunding campaign could have the additional advantage of drumming up media coverage and PR for your business.
  • You will have the opportunity to get some feedback on your product or service from a large pool of investors.
  • Investors often become very loyal customers due to the connection that they feel with your business.

Disadvantages

  • Creating a successful campaign takes resource. It will take time, effort and money to complete a professional looking campaign. This is not as easy or fast as some of the more traditional forms of funding.
  • If you fail to meet your financial target, then any investments you have received will usually have to be returned and you will end up with nothing.
  • While a successful campaign can reap huge benefits in terms of marketing and PR for your business. The opposite is also true if your campaign is a flop.

For more information on crowdfunding, take a look at the Gov.co.uk website.

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