Free Startup Capital – Crowdfunding explained

Friday Feb 12, 2016 - 8 Comments
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What is CrowdFunding?

Crowdfunding is simple the method of raising capital through the collective effort of friends, family, customers, and individual investors- either known or unknown. This approach taps into the collective efforts of a large pool of individuals—primarily online via social media and crowdfunding platforms—and leverages their networks for greater reach and exposure.

well that is something we do everyday anyway, so why does it have such a fancy name all of a sudden? what necessities a new name for technical appealing for funds or begging for alms as some see it.

Well, Crowdfunding is essentially the opposite of the mainstream approach to business finance. Traditionally, if you want to raise capital to start a business or launch a new product, you would need to pack up your business plan, market research, and prototypes, and then shop your idea around to a limited pool or wealthy individuals or institutions. These funding sources included  banks, angel investors, and venture capital firms, really limiting your options to a few key players.  You can think of this fundraising approach as a funnel, with you and your pitch at the wide end and your audience of investors at the closed end. Fail to point that funnel at the right investor or firm at the right time, and that’s your time and money lost.

Crowdfunding platforms, on the other hand, turns that funnel on-end. By giving you, the entrepreneur, a single platform to build, showcase, and share your pitch resources, this approach dramatically streamlines the traditional model. Traditionally, you’d spend months sifting through your personal network, vetting potential investors, and spending your own time and money to get in front of them. With crowdfunding, it’s much easier for you to get your opportunity in front of more interested parties and give them more ways to help grow your business, from investing thousands in exchange for equity to contributing GHC50.00 in exchange a unit of the first batch of the product or some other expected related reward

There are numerous crowdfunding platforms where consumers can safely ask for or donate money such as KickstarterIndiegogoRocketHub etc, to name a few. While each site offers their unique spin, the general concept is the same across the board. Project creators can create a profile typically containing a short video, an introduction to their project, a list of rewards per donation, and some images to elaborate. The idea is to create a compelling message that readers will be drawn towards.

 The idea of “its not what you do, but why you do it,” really hits home here. By focusing on a bigger purpose, the driving force behind a brand, project creators will be able to create a unique community of likeminded individuals. Each campaign is set for a goal amount of money and a fixed number of days. Once the project is launched, each day will be counted down and the money raised will be tallied up for visitors to follow its success.

How does crowdfunding work?

Businesses can get funding by attracting a ‘crowd’ of people through a crowdfunding website that want to invest in a project or business idea. Funders can be individuals who simply support the project, another business or a professional investor. Unlike traditional or ‘angel’ investment, where one person typically takes a large stake in a business, each funder contributes by making a small contribution to a funding target. The other major difference with traditional investment is that crowdfunding does not always offer participating funders a stake in the company.

Instead, entrepreneurs are coming up with new ways to entice people to part with their money, for example free samples for small individual donations or sponsorship deals for companies. To attract funding, you first have to write a ‘pitch’, which is usually checked by the site’s owner for suitability and chance of success before being published. Once it is, it’s up to you to raise awareness of your pitch – many businesses use email and social media to do this – and try to find investors to support you.

If you do not meet your funding target, your pitch is deemed unsuccessful and the money donated will be refunded to the funders. If your pitch is successful, there is a short ‘cooling-off’ period where investors are given the opportunity to confirm or withdraw their investment. Once all the funding is confirmed, the case is referred to a legal department who formalise the deal and the money is then transferred to your bank account. Unless they’ve chosen to be anonymous, you are given your investors details so you can deliver their rewards and keep them up to date with how their money is being spent.

How much does crowdfunding cost

It’s usually free to publish a pitch, but the website will usually take around 5% commission from your target if you reach it. It is worth factoring this amount in to the target total when you write your pitch. You will also need to consider the cost of your ‘rewards’ to funders.

These are incentives to encourage funding and are usually staggered in value to reflect the amount given. These can include samples, discounts, exclusive first access to the product you’re developing and sponsorship – or anything you can think of that might make your pitch appealing. Some funding websites do allow you to offer a small proportion of equity in your business, to attract larger investments.

The business benefits of crowdfunding

Quick and simple – It’s relatively quick when you compare it to other types of funding. Pitches generally only run for a few weeks, and some people reach their target in a matter of days. Legal admin is usually handled by the site as well, so you don’t have to worry about that.

Create fans – By investing in your business or idea, funders are going to be instantly more engaged with your company and interested in seeing it become a success.

Less risk averse – Crowdfunders may be more likely to take a chance on an unproven business idea, simply because they believe in it.

A vote of confidence – Getting public backing from individual customers and other companies is a great way of showing that your idea has support.

It’s newsworthy – With crowdfunding being a relatively new concept Globally, the press might be interested in running a positive story on your business’s success.

What’s the downside of crowdfunding?

Copycats – If you’ve got a particularly unique idea, you may not want to share it on the internet. Make sure your work is protected by intellectual property laws including trademarks and patents first, if necessary.

Promotion – Although your pitch will get some exposure just by being on a website, it will take a lot of your time and energy to create a buzz around it and let people know about it.

Little or no regulation – Almost all of the crowdfunding websites, as at the end of last year, were not regulated by any individual financial body. This made it slightly risky in a sense for the investor. But in sustaining a reputation and building a good user base, it is essential that the sites are trusted.

Is crowdfunding right for my business?

Currently, Crowdfunding seems to be attracting mainly start-ups who are trying to get their business idea off the ground, but this doesn’t mean other businesses can’t participate; all you need to create a pitch is a strong idea and an interesting story that will compel people to back you.Pitches that are uninspiring or struggle to explain a complex business idea are more likely to struggle to attract funding. Badly thought out pitches are also destined to fail. Do your research beforehand to find out if your business idea really has legs and discover what kind of rewards potential investors will respond to.

starting out on your own is by no means a small feat and so every little bit of support helps. Enjoy the week ahead and all the best as you find ways to bring your ideas to life. Share your opinions, contributions and ideas in the comments area below or send me an email at [email protected]

Shalom

 

Comments

    • Hi Obiri, i see your challenge which is quite common place these days. For starters, nobody will invest in an idea you are not ready to invest in your self. so if you must, learn how to develop the app. if you find it slows your time market, find a developer who will take a share of the business idea instead of money (equity for time investment). I hope i have been helpful. let me know how it plays out.

  1. ideas are there but opportunities are scares.please help by guiding me on how to write a pitch and type of pitches that are more likly to atract fundings. please just help.

    • Phil, there a many resources available online for learning to put together a pitch. Do a general search and it should be too difficult to come by one. Additionally, spend some time on inc.com or entreprenuer.com or kenkeyfranchise.com and you will most definitely come across some tutorials. Let me know what you find.

  2. am Emmanuel kore, university student level 300 at Pentecost university and am into farming of rich and me been a student it cannot do it in a large hectares, the small I do I used to get 20 bags and more so please I need crowd funding to support me to do it in large , I would like to send you pictures if you are interested. thank you

  3. Hello Paakojo
    Pls kindly help me this IDEA I have
    There’s this product I want to import in the country and my target market is for people livivng with DIABETES pls what must I do in terms of funding …tnx

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