Crowdfunding is to financing what Uber is to taxis or Airbnb to hotels: using the wisdom and resources of the crowd to raise money.
Crowdfunding typically brings together many smaller investors or donors to fund a company, startup, or personal initiative. The concept is based on the collective effort of a large number of people who invest small amounts and take advantage of the Internet as a platform to present their campaigns and reach potential investors around the world.
To put it in simple terms, the through crowdfunding It's the modern equivalent of throwing coins into a hat to help create funds for a cause or idea. Basically, it is when an individual, a startup or an organization presents their idea to a large group of investors potentials in hopes of raising a specific amount of money.
Types of crowdfunding
Broadly speaking, there are four types of crowdfunding:
- Rewards-based crowdfunding: Sponsors give money to a project and receive a tangible item or service in return. Kickstarter e Indiegogo are popular platforms of this type.
- Stock Crowdfunding: Investors receive a stake in the company, usually in the form of shares. This type of crowdfunding is regulated by financial authorities to protect investors. This has been possible in Europe for some time, with crowdcube y seedsrs leading the way. In the US, equity crowdfunding is newer and several sites are emerging, including WeFunder, startengine y Republic.
- Debt crowdfunding (or peer-to-peer lending): Sponsors lend money to the project or business with the understanding that the money will be repaid with interest. Platforms like lendingclub y thrive They facilitate this type of crowdfunding.
- Donation-Based Crowdfunding: People donate to causes, projects or organizations without expecting anything in return. GoFundMe It is probably the best known platform.
How does it work?
Instead of raising large amounts of funding from institutional investors such as banks, venture capitalists, or private equity firms, crowdfunding solicits a large number of smaller investments from the public.
To these potential investors They are presented with a well-designed campaign that details everything from the concept and roadmap to the potential benefits for supporters. Depending on the type of crowdfunding, a campaign could offer rewards to backers, shares in the business, or simply the satisfaction of contributing to a cause of social value.
Pros and cons of crowdfunding for startups
Crowdfunding offers a novel way for startups to raise funds, validate their market, and build a community. However, it also requires substantial effort and can divert activity from creating the startup for significant periods of time.
Crowdfunding professionals
Crowdfunding provides a way to raise funds without traditional bank loans or giving up capital to venture capitalists. It is particularly useful for startups that may not have access to traditional funding sources.
This can also help find market validation: by “selling” the product before it is mass produced, you gain early feedback and gauge market interest. A successful campaign can be a strong signal that there is demand for your product or service.
The good thing is that a crowdfunding campaign can work like a marketing campaign. It generates buzz and provides a platform to share your story, mission and vision, potentially attracting customers, investors and media attention.
Crowdfunding also tends to attract early adopters who become very enthusiastic about the existing product; It can be a great way to find a community of followers who are interested in your success. These early adopters can provide valuable feedback, promote your brand, and remain loyal customers for many years.
Another benefit is that crowdfunding poses a relatively low financial risk for the startup. Unlike traditional loans, crowdfunding does not require repayment if the business is not successful.
Cons of crowdfunding
However, it's not all rainbows and unicorns. Crowdfunding campaigns also come with risks and downsides. Creating and managing a successful crowdfunding campaign requires significant effort, including creating promotional materials, updating backers, and handling logistics. Good campaigns must be well marketed, which can also be very expensive.
Another challenge is that by sharing the idea with the public, you risk exposing it to potential competitors. It is also being effectively prototyped in public, so there is a chance of receiving negative feedback or criticism; Even if the reviews are invalid (after all, people haven't tried the product yet), it is available in black and white. which entails some reputational risk.
While financial risk is typically limited, successful crowdfunding campaigns they make them have obligations. The idea is that you have to fulfill the promises made to sponsors, which may include the production and delivery of products. This can be a challenge for a new startup.
Most platforms also have a curious quirk: you must meet your fundraising goal to receive money. Not reaching your goal can mean getting nothing, even if a significant amount is raised.
With respect to raising large amounts, crowdfunding platforms typically charge a fee based on a percentage of the funds raised, which can affect the total amount you receive.
Of course, if the platform itself adds value, it could be worth it, but for many startups, the fees can end up being significantly higher than they would have been if you had done more traditional sales.
6 tips for running a successful crowdfunding campaign
1. Do not have a poor quality product
Today's market is flooded with new ideas and innovations, making it increasingly difficult for any product to stand out without a unique value proposition. A well-conceived product addresses a clear market need or solves a specific problem in a way that is effective and superior to existing solutions.
This superiority can manifest itself in the form of innovation, ease of use, cost-effectiveness, or a combination of these. This goes beyond its immediate market appeal.
In the context of crowdfunding, where potential clients and investors are appealed directly, the product is the strongest argument. Crowdfunding platforms are packed with discerning backers seeking not only innovative products, but also evidence of viability, scalability, and long-term value.
2. Don't ruin the economy
The way to him fracaso of crowdfunding is paved with budgets that are not based on reality. Running a campaign comes with its own set of financial challenges, particularly in the areas of production and fulfillment.
You have to be very aware of the costs involved in taking the product from concept to the customer and make sure you don't miss any of the steps along the way: unexpected expenses in product development, certification, testing, manufacturing and logistics, such as shipping and returns have been the bane of many campaigns.
The most important thing is to price products in a way that covers costs and generates profits, while still being attractive to sponsors. This delicate balancing act requires a deep understanding of the economics of production and distribution, ensuring that the project remains financially viable throughout its lifecycle.
Don't assume that things will go as planned, absolutely, 100% guaranteed, they won't.
3. Tell a great story
The power of good storytelling cannot be underestimated. A great narrative like this one from Tilt Five, which is a rallying cry to bring back board games in an augmented reality world, can elevate products from “average” to “excellent”:
For crowdfunding in particular, where the future is sold, compelling narratives are as important as innovative products or ideas. A great story captivates potential backers, creates an emotional connection, and takes them on the journey of the product or idea being funded.
This narrative must do more than simply inform; It should inspire, resonate with the audience's values, and paint a vivid picture of the impact the product or initiative will have. Those who master the art of telling stories stand out. They are not just selling a product; They are inviting sponsors to be part of something bigger.
Startups should view the crowdfunding campaign as an opportunity to start building the brand story, one that will evolve but always stay true to the narrative and core values. At its core, storytelling in crowdfunding is not just a means to an end; It's an integral part of building a brand identity that resonates with customers, creates emotional investment, and stands the test of time in a rapidly evolving startup landscape.
4. Manage expectations
Managing expectations is as critical as the campaign itself. The history of crowdfunding is littered with stories of campaigns that did not achieve their objectives, which could also be classified as a "success": if you prove that there is no market for your product, you do not have to go through the seven circles of hell involved in manufacturing. a product.
Much worse are the campaigns that achieved financing but failed in their execution. The truth is, crowdfunding is a complex dance of product, marketing, customer service, and a little luck. As a startup founder, you have to understand that while optimism is the driving force, realism is the guiding star. Setting realistic goals and transparently communicating potential risks and challenges not only builds trust among sponsors, but also cushions the impact if things don't go as planned. This transparency is vital to managing the expectations of sponsors who are, in essence, the first to adopt and invest in that vision. How challenges are addressed now will reflect on the brand's reputation in the future.
5. Get help
Rome was not built in a day, but most importantly, it was not built by a single person. Bringing a product to market is a multidisciplinary challenge and it is rare that a small startup team has all the skills to achieve it. The good news is that it is not necessary.
You have to rely on the right people. Marketers are crucial in crafting and disseminating their story to the right audience, generating pre-launch buzz, and leveraging the right channels for maximum impact. Similarly, product development experts provide insights into design efficiency, user experience, and profitability, helping to refine the product to meet and exceed market expectations. These professionals improve the quality and appeal of your campaign and avoid expensive revisions and errors.
The complexities of manufacturing and supply chains, especially overseas, require specialized knowledge. Experts in these fields can navigate the complexities of cultural differences, language barriers, and business practices, ensuring quality production, along with legal, financial, and regulatory compliance. Logistics professionals are essential for efficient distribution, inventory management, and customs handling, especially for international shipping. Their guidance ensures that your product reaches your patrons and does so in a timely and cost-effective manner. In essence, surrounding yourself with the right team of experts is not only beneficial for a crowdfunding campaign: it is a strategic necessity for success.
6. Share the love
There is something communal about crowdfunding. Aggression and camaraderie still flow through the veins of the genre in a universe where cynicism otherwise runs quite deep. If you've run a successful campaign, help your fellow crowdfunders by offering your shoulders to lean on. Share your experience, your highlights and your lowest moments. An example: this great story of How My $500.000 Kickstarter Campaign Failed in a Giant Nuclear Cloud of naivety, trusting the wrong suppliers and bad luck is a great guide.
