Straying away from the traditional financial resources usually provided by banks, business angels or venture capital firms, a new method of financing has been established which allows qualified individuals to raise money online. It is known as Crowdfunding. The main purpose of crowdfunding is to enable individuals to bring their innovative creations to life, and build a customer base.
Crowdfunding is the much-needed opposite of the mainstream approach to business finance. With the growth of the internet, Crowdfunding has become an increasingly popular way for startup businesses and entrepreneurs alike to raise funds. The adequately low cost of entry and accessibility of popular crowdfunding platforms have influenced this revolution in funding.
Startup businesses are a brand new company in their primary stage of operation and are 0-3 years old. Revenue most likely isn’t generated and startups are looking to raise funds in order to headstart the business and carry out research or development.
The funding most startup businesses look for is seed money, whether for office space, licenses, inventory, product development and manufacturing, marketing or any other expenses that need to be covered.
Everyone that is crowdfunding has created a beneficial solution (in the form of a product or service) to help solve a problem or to fill in a gap in their respective market, which has garnered the attention of interested investors.
As an example, Core Collective is a British boutique fitness studio determined to make fitness fun, effective and innovative, by offering a unique, relaxed space where trainers conduct efficient, results-driven classes with no pressure or attitude. They were only a year and half old before they decided to crowdfund. They crowdfunded on Seedrs in 2017, raising a whopping amount of £2,056,412.
Startup Crowdfunding – Crowdfunding types and platforms
The most common crowdfunding model used by startup business is Equity-based, but it is not the only option and there are other crowdfunding types which can be used, such as Rewards-based, Donation-based and Lending-based.
Rewards-based Campaign: This promises investors that they will be rewarded (usually with a non-monetary reward) for contributing to the organisation’s campaign. Indiegogo and Kickstarter are the most common platforms to use for a rewards campaign. Kickstarter is a funding platform for creative projects and one of the world’s largest crowdfunding site, and Indiegogo is an international funding platform for ideas, startups and charity.
Equity-based Campaign: This type of campaign offers investors equity (a share) of the business to the investor, encouraging individuals to invest knowing they will benefit from it. The common platforms to use for equity-based campaigns are Crowdcube and Seeders. Crowdcube is the UK’s leading equity-based crowdfunding platform for entrepreneurs and big-scale start-up projects, and Seedrs is an equity crowdfunding platform used around Europe, helping startups and late stage businesses.
Donation-Based Campaigns: Donation campaigns assist charity projects to find their funding, offering no rewards apart from the satisfaction of donating to a worthy cause. The largest and common platforms that are used are Just Giving and GoFundMe. GoFundMe is the #1 fundraising platform online with a for-profit crowdfunding structure and JustGiving is a global social online platform for charity giving.
Lending-Based Campaigns: When a large group of investors collectively decide to make a mall contribution to an individual or business looking to raise funds, and in return, the loan is paid back with interest over time. Funding Circle and LendingCrowd are two of the most popular peer-to-peer lending platforms. LendingCrowd is an online peer-to-peer crowdlending site, giving support to small and medium-sized businesses, and the FundingCircle a peer-to-peer lending marketplace, allowing investors to make direct lendings.
Startup Crowdfunding – Before you crowdfund…
Before you decide to crowdfund you need to ask yourself a set of questions, which will indicate if crowdfunding is the best option to fund your business.
Here are the questions:
– Are you willing to invest significant time and effort?
– Does a product like yours already exist?
– Do you have a valuable offer?
– Is your business plan solid?
– What makes your product unique?
– Do you have a target market?
– Are users of similar products hungry for a better solution?
– Are there enough hungry users to fund your project?
After you have answered the questions above, you should be certain that crowdfunding is the appropriate funding channel for your business. If you want to find out more about the components of a crowdfunding campaign, read our article all about it here.
Startup Crowdfunding – Benefits of Crowdfunding
There are numerous factors to take in mind when it comes to Crowdfunding for your startup. Here are some benefits of crowdfunding to keep in check:
- A quick way to raise finance with no upfront fees
- It can be a valuable form of marketing
- It helps you get a following
- An effective way of doing market research
- You often receive feedback and expert guidance,
- Your investors can track your progress and help promote your brand
- As a result of the crowdfunding process, your investors become your most loyal customers
Startup Crowdfunding Examples
There is no better way to understand the impact of Crowdfunding for your startup than looking at those who did it and were successful at it.
Pulp – Case Study
Pulp have developed a unique app which helps people to discover their taste and sends them wine recommendations carefully tailored for them. A start-up business that sought crowdfunding to raise awareness of their brand and build a trustworthy network. The Pulp crowdfunding campaign skyrocketed to being 100% funded on day 1 and was also featured on Indiegogo’s homepage. After their crowdfunding campaign, they generated a great amount of press, receiving praises from the Sunday Times, EveningStandard and Great British Chefs. They are now preparing for the release of their new feature “My Wine ID” while still holding events for the WeWineTour, which helped them build their customer base.
Dame – Case Study
Dame has created a singular reusable no carbon applicator, that works with almost all tampons and is so easy to use, clean and storable. It uses self-cleaning technology so women can enjoy the comfort of an applicator without the plastic waste. Dame crowdfunding campaign garnered the attention of most backers through their rewards options with reasonable pledge goals. Dame ended their campaign with the support of 2,251 backers which pledged £55,913. Crowdfunding helped Dame start a new discussion of the safeties of environmentally aware female products and raise funds to push their brand forward. They were labelled by the press as the “period product of the 21st century” and are available for purchase on Indiegogo.
How Drop can turn your idea into a success story
- Immediate feedback on whether your business is suitable for crowdfunding
- Access to Drop Studio’s Crowdfunding Accelerator Service – available for Crowdcube approved campaigns only
- Crowdfunding strategy and planning
- Marketing strategy and marketing content – social media posts, ads, emails
- Management of social media profiles, ads and email marketing
- Crowdfunding video production – treatment, script writing, filming, editing with animation, promotional content
- Ongoing crowdfunding support throughout the whole campaign