Crowdfunding

Crowdfunding is a method of raising capital through the collective efforts of friends, family, clients, and individual investors.

This approach brings together the efforts of a large group of people, usually online through social media and service-oriented platforms, and leverages their networks for greater reach and exposure.

Differential aspects of Crowdfunding

Crowdfunding is essentially the opposite of the conventional approach to business financing.

Traditionally, if a person wanted to raise capital to start a business or launch a new product, they would need to create a business plan, market research, prototypes, and so on. After that, present your idea to a limited group or with wealthy people or institutions.

These funding sources included banks, business angels and venture capital groups, limiting options to a few key players.

This fundraising approach is like a funnel, with the entrepreneur and their pitch at the wide end and the investor audience at the narrow end. If you don't correctly target that funnel to the right investor or company at the right time, you lose a lot of time and money.

Crowdfunding platforms, on the other hand, expand that funnel. They provide the entrepreneur with a global communication platform to create, showcase and share resources for the launch of the initiative. This produces a significantly more agile environment compared to the traditional model.

Entrepreneurs typically spend months analyzing their networks, researching potential investors, and spending their own time and money to gain exposure to them.

With crowdfunding, it's much easier to have the opportunity to get in front of more stakeholders and give them a variety of ways to help grow the new model.

These forms range from investments in exchange for capital to contributing minimum amounts in exchange for a product in its first version or other types of rewards.

Crowdfunding Benefits

From having a larger pool of potential investors to expanding fundraising options with more flexible methods, crowdfunding has significant benefits over traditional methods.

Some of the main advantages are access to a wider network of investors, a more direct and light form of presentation, centralized and targeted marketing, validation of the concept and efficiency.

Access a wider network

By using a crowdfunding platform such as foundable, the founders of the initiative have access to thousands of identified and validated investors who can see, interact and share the published fundraising campaign.

Home

When creating a crowdfunding campaign, entrepreneurs need to present their business from the highest level (story, motivation, value proposition, target market, etc.) and summarize it in a polished, simple and easily understandable package.

This simplification effort highlights the knowledge of the environment, the market, the competition and other factors, and it is also produced in a unidirectional way with issues, if any, that do not occur in real time. This constantly improves the way the message is conveyed.

This communicative development is not usually carried out in the same way in traditional financing rounds where there are longer conversations and denser documentary supports.

Centralized and targeted marketing

From launch to completion, entrepreneurs can share and promote their campaign through social media, email newsletters, and other online marketing tactics.

As the founders and (hopefully) other media outlets cover the fundraising progress, you can double the activity by driving traffic to the company's website and other resources.

concept validation

Presenting a concept or business in a massive way provides an excellent opportunity to validate and optimize the value offer.

As potential investors begin to express interest and ask questions, entrepreneurs quickly see if there are any missing points that would make them more likely to be interested as capital or as clients.

Efficiency

One of the greatest values ​​of online crowdfunding is its ability to centralize and streamline the fundraising process.

By building a single online profile that founders can funnel all of their potential clients and investors into, it eliminates the need to search for each of them individually.

In the traditional model, efforts must be multiplied by printing documents, compiling studies and manually updating each one of the reports when there is an update of the data.

In an online Crowdfunding platform, entrepreneurs can present everything in a much more accessible format, allowing them to have more time to manage the business instead of the fundraising process.

Types of Crowdfunding

There are four main types depending on the concept used to raise capital: gifts, rewards, shares and loans.

Donation-Based Crowdfunding

In general, these types of campaigns they aim a financial return for investors or taxpayers.

Donation-based initiatives include fundraising for environmental catastrophes, charities, nonprofits, and health-related issues in under-resourced geographic or social settings.

Rewards-based crowdfunding

In this case, people are involved who contribute to a business in exchange for a "reward", generally the product or service offered by the new initiative.

Although this method offers a reward that can be valued by backers, it is often considered a derivative of donation-based, as there is no financial or capital return.

This approach is common in foundable, Kickstarter e Indiegogo, allowing business owners to incentivize their taxpayers without incurring many additional expenses or selling shares of ownership.

Stock-based crowdfunding

Unlike previous methods, equity-based crowdfunding allows investors to become co-owners of a company by earning shares based on the capital contributed.

As owners of shares, contributors receive a financial return on their investment and, in the best case scenario, a portion of the earnings in the form of a dividend or distribution.

Equity crowdfunding is suitable for companies looking to raise more capital through an open investor network.

Typically, these companies are pursuing amounts greater than $50.000, have tested their offering in the market, and have gained enough traction to incentivize potential investors with an opportunity to own a small piece of their company as the market unfolds. growth.

The very nature of equity crowdfunding makes it a considerably more complicated approach to fundraising than rewards. To this must be added the fact that it is a method with taxation, legality, compliance and regulation still in evolution, and therefore generates a higher degree of complexity for platforms and investors.

Loan-Based Crowdfunding

It allows raising funds in the form of loans that will pay the borrowing entity in a predetermined term with an established interest rate.

Loan campaigns tend to take place over a short period of time, around five to thirty weeks, and work well for entrepreneurs who don't want to give up ownership, doling out initiative shares from the start.

See other financing methods how Series A, B, C, D and E, small business loans, grants, private investors, business angels, …