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Crowdfunding: the basics


Have you ever had a great idea and wondered how to fund it? Or started your company and wanted to grow but you lacked the capital to take the next big step? Well, crowdfunding may be the answer. Crowdfunding is when a large group of people make small donations or investments into project or venture to help fund it. This is typically done via a platform on the internet.

There are four types of crowdfunding. Each one deals with the funds raised differently.

  1. Equity based crowdfunding is when the lender is given a portion of the company or product and they receive returns on the profits that are made.
  1. Donation based crowdfunding is when people give money for a charitable cause. This type of crowdfunding is usually used by NGOs.
  1. Lending based crowdfunding is when a group of people lend the money to help create the product and the money is paid back over time.
  1. Reward based crowdfunding is probably the most popular, and this is when people receive different benefits dependent on the amount of money they give to the project or venture.

To have a successful crowdfunding campaign, it is important to be social media savvy or at least know someone who is.

Some of the aspects to consider when starting a crowdfunding venture are:

A compelling story

You need to produce a video pitch which will encourage potential investors to part with their hard earned cash. A good business plan and being enthusiastic about the venture will go a long way to securing those much needed funds.

Great perks

If you are doing reward based crowdfunding, then you need to ensure that the perks people receive with the amount of money they donate are enticing. Some exclusive perks could be to give input on the design of the packaging or to have dinner with the creator of the product.

An existing network

This is essential to a successful crowdfunding venture. You need a group of friends and family who are excited about your venture and willing to start the donations off. If you have this, then other people will trust your venture and be willing to contribute to it.

The upside of crowdfunding is that you are able to get market validation for the product you wish to produce before it goes into production. Furthermore, you create a group of potential buyers for your product. Another advantage of crowdfunding is that you have people who want to see the venture succeed and they may give you input on the product to help improve it.

Here are some aspects to consider before embarking on crowdfunding:

You may not get the funds

On many platforms, if you don’t not reach the target you have set then the money is returned to the donors.

There are limitations on how the funds are used

When you gain funds from a crowdfunded venture then they have to be used to create the product and cannot be used to finance other areas of your business.

Intellectual property protection

Your idea will be hosted on the internet for everyone to see. It is important that the idea is unique and cannot be easily reproduced or else someone may steal it and it may be very hard to prove that you have come up with the original idea.

Even with these hindrances, crowdfunding is great way to get the funding you need to start your new venture or project. So go out there and spread the word. Let the world help you to realise your dreams.

Proudly brought to you by the National Small Business Chamber (NSBC).