The added value of crowdfunding

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In contemporary Europe it is not easy for webentrepreneurs to raise capital . In the last years, the total number of loans and money distributed for the Small to Medium-sized Enterprise (SMEs) has dropped.

In this “disruptive economic period”, crowdfunding offers an interesting and new perspective for webentrepreneurs in need for capital and funding of their businesses and innovations. Here are 10 great benefits that crowdfunding offers to SMEs and webentrepreneurs. These benefits show what the added value is of crowdfunding next to the traditional ways of finding investors for your venture of project.

1) Access to capital

Crowdfunding enables an entrepreneur to raise capital inside and outside of their own network without the help of capital from accredited investors, venture capitalists, and banks.

Crowdfunding is a great alternative way to fund your business and it can be done without giving up equity or accumulating debt.

For example: reward-based crowdfunding platforms allow entrepreneurs to raise funds from the community in exchange for simply giving them tangible products or other related gifts.

2) It reduces risks

Launching a crowdfunding campaign reduces risks because a crowdfunding campaign serves as a valuable learning experience. Crowdfunding allows a webentrepreneur to gain market validation. At the same time you are testing the waters before you actually launch your product or venture i.e. if your campaign fails you have time to improve your product before it’s actually launched.

3) Effective and value for money marketing

Crowdfunding campaigns are a good way to introduce business opportunities to the market. Most crowdfunding platforms and websites incorporate social media mechanisms, making it easy to gain referral traffic to websites, social media pages and consequently funders. These funders also drive campaign causing them to go viral, because they ‘share’ their pledges and/or donations with their networks.

4) It proves concepts

Creating sufficient market validation at an early stage is complicated. Crowdfunding however makes this a lot easier. A successful crowdfunding campaign can help convince future investors to invest in the concept. It generates trust because ‘the crowd’ backed the project and therefore believed in the start-up concept!

5) It takes Crowdsourcing to a higher level

Through crowdfunding your audience is heavily involved. The engagement with your public is fairly high compared to traditional capital raising ventures. Therefore they will be more prone to give comments, feedback and share ideas with the crowdfunding webentrepreneurs. Such feedback and involvement reduces the likelihood of failure and helps entrepreneurs to optimize their plans and reduce the number of ‘blind-spots’ in their business concepts. Your funders and thus future customers or ambassadors become active partners in realising your project or business.

6) Introduction to prospective loyal customers

During its infancy, the why, what and how of a crowdfunded entrepreneurial vision are important to convince backers and get them onboard. These are communicated during the process of raising funds through crowdfunding and due to this, these early adopters are very connected to the project/cause. This also means that as things mature the early adopters will stay extremely loyal and even more so they will spread the word over most of the projects’ lifecycle..

7) Easy application in comparison to traditional investments

Applying for a loan, investment or support from The Dragons Den using traditional methods is an extremely difficult process for a web entrepreneur; especially when the company is in an early stage.

Comparably, the application process for crowdfunding is fairly easy. Of course the crowd and platform will look thoroughly into the financial background and ideas behind the business plans, but support criteria will differ to the traditional financial institutions. Especially on the issue of risk analysis, the platform will leave the final call to the crowd itself and the crowd will give different interpretation of the risk involved with the investment than for example a bank will. The small investor in the big pool of crowd-investors, also has different reasons, they may support the project because they are sympathetic to the cause rather than just solely for financial gains.

8) Free publicity

A lot of companies doing crowdfunding campaigns are innovators or game changers in a traditional market. They therefore have very high media value. Furthermore, because raising capital via crowdfunding is fairly new it is likely that your press release will be picked up by local or even national media.

The attention generated by successful crowdfunding campaigns will attract potential investors from traditional institutions and draw the attention of other media outlets. Successful crowdfunding campaigns are perfect food for story hungry journalists.

9) It provides the opportunity of pre-selling

Crowdfunding campaigns give entrepreneurs the ability to do pre-sales for products and concepts that haven’t been released to the market yet. This is perfectly in line with the pretail trend in which customers not only are able to check pricing, specs and availability anytime all the time, some also want to be in the know before a product launches.

10) It sometimes is really cheap money

The average commission for the platforms is roughly 5% of total funds raised. Depending on which model of crowdfunding is chosen costs will vary compared to traditional funding methods. Admission fees of platform are relatively low. As already mentioned it depends on the crowdfunding model which has been chosen but for example interest rates with crowdfunding are lower in general, donations are “free money”, in a way selling equity via crowdfunding is “free money” to and pre-sales gives security and guarantee for turn over and normally profit in advance. However, take into account that you will have to invest time and money to run your campaign. Think of video editing or copy writing, but also sending out your rewards after your campaign succeeded. It might also be necessary to provide additional documents to investors like valuation reports or a financial plan. Depending on what you can produce yourself you will have to pay an accountant or other professionals.

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This post was originally published as part of Startup Europe. The European Commission’s Startup Europe initiative was created to connect web entrepreneurs across Europe, providing networks, resources and information to help them startup their business and grow, creating new jobs and transforming the economy and society.

 

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