Crowdfunding has of late become big business. Each day, the crowdfunding ecosystem is able to drive millions of dollars of revenue across the world. It has also turned out to be a serious game-changer in the business world, especially where startups are concerned. However, as an entrepreneur looking to turn to crowdfunding, there’re a few things you should understand this type of alternative finance.
Different Types of Crowdfunding
According to Rangewell, there exist two main types of crowdfunding for startups: equity-based and rewards-based.
Equity-Based Crowdfunding
Equity-based crowdfunding is a type of business finance where donors get to receive shares in your firm. Shares to be allotted to each donor is determined by the total amount contributed. Often, the people contributing to such companies strongly believe that the company has a bright future ahead of it.
Here, the success the startup receives will influence the kind of returns that the donor will get for the investment they made. It’s a method of crowdfunding recommended for businesses that have put in place solid growth and expansion plans. Keep in mind that after the crowdfunding exercise is complete, you will be left with contributors to your company.
The presence of these contributors may lead to potential hiccups down the line. For instance, you are likely to start receiving increased scrutiny from industry and government regulators.
Rewards-Based Crowdfunding
In this type of crowdfunding, the contributors get to receive a service or product related to that particular project. Often, the value of the service or product offered to them for contributing is determined by the amount. For example, a donor that has made a $5 contribution/donation may be offered a handwritten thank you card as a reward.
While those that have contributed higher amounts, e.g., $50 or $100 may get early access to the services or products being provided by the company. Reward-based crowdfunding is recommended for startup owners looking to get their companies off the ground. It’s a good idea in that the entrepreneur won’t be weighed down by loans or be beholden to shareholders.
Keys to Crowdfunding Success
The company stands out in a crowd
For any crowdfunding campaign to become a success, the company or business in question needs to be in a position to capture the minds and interests of potential investors. This calls for you to come up with a unique product that will fill a certain void already present in the market. You also need to have a strong business or personal story that can motivate investors to take a chance on your company.
Investors value the reward
At the end of the day, each investor is looking to get a good return on the investment they have made. You must, therefore, provide them either a reward or equity that will be compelling enough for them to invest.
You have a broad network
Having friends and family members that are willing to support as well as promote the business, and your causes can help in boosting your fundraising efforts. It becomes harder for you to attain your financial goals when you don’t have access to a ready promotional base.
Final Word
Crowdfunding is likely to work and help you to secure the finances you need to get the business off the ground. In the process of crowdfunding, you may also manage to generate some buzz that will assist in creating interest in your products and/or services. But in the long-run, crowdfunding isn’t a long term way of financing your business. A time will come when you will need to start looking at alternative finance options to keep the business going.
