Understanding what type of crowdfunding is best for your startup

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Crowdfunding is generally a good option for your project if one ore more of the following points are met:

– You can clearly communicate and explain your project’s added value. Projects whose business model or concept cannot be clearly communicated and easily understood by most of the people will probably encounter difficulties in raising money through crowdfunding. People won’t pledge money if they cannot immediately understand the added value of the business.

– Your project has already a fan community on social networks. Crowdfunding is all about leveraging your existing networks and expanding them. Having, before starting the crowdfunding campaign, a community of fans and followers on social networks will certainly be of great help in raising money and awareness.

– You want to test the market potential of your project. Crowdfunding is also a great market survey tool. By launching and promoting a crowdfunding campaign one can test the market potential the project has, that is if there is a good demand for the solution one is offering. This, eventually, could also come handy when approaching, later on, professional investors, like VCs and business angels.

You want to raise capital, but also promote the project. A well run crowdfunding campaign will not only provide you with funding needed, but also generate a lot of buzz on social network and raise media attention.

 More in detail, you should consider

  • Reward crowdfunding

    • If you can offer appealing rewards at zero or low costs. When you calculate the target budget you want to raise through crowdfunding you need to take into account the costs associated with the reward production and delivery. Therefore the less expensive are the reward costs, the better it is for you.

    • If you do not want to give away equity capital. If you need capital, but you are not willing to give away equity, reward crowdfunding might be the solution for you. In fact you are receiving money in exchange of products or services.

    • If you have a tangible product. If you are offering a tangible product, crowdfunding can be an excellent solution for you to raise capital. In fact, reward crowdfunding has proved to work great as a pre-sale tool for hardware products, since the product is offered in exchange of a money pledge that is slightly less of what would be the retail price.

  • Donation Crowdfunding

    • If you project is not for profit or if you are supporting a social cause. When there is a social cause at the base of your project, people do not need material rewards in exchange of donations, because, donating, in this case, is just a matter of being altruistic.

  • Equity crowdfunding

    • If you have a potentially profitable and well planned business model. For example, for web entrepreneurs, who lack a tangible product, but may have an interesting business model in mind, equity crowdfunding might be the right choice.

    • If you do not have access to professional investors. If you have troubles finding a couple of professional investors willing to invest in your project, either because you do not have the right connections to reach them or they are simply not interested in your project, do not give up! You can always try to run a crowdfunding campaign and prove them wrong!

  • Peer-to-peer lending

    • If you can prove you are able to pay the loan back. This is particularly important in order to receive a good evaluation that will allow you to get a loan at a competitive cost.

    • If you want to exploit the leverage effect.

These are of course not necessary requirements, but they are just general tips that might be helpful in guiding you when deciding what form of crowdfunding to use. Eventually, the final choice is always up to you and your business’ needs.

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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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