Crowdfunding has changed the game for creators, businesses, and even the general public. Not only can businesses use crowdfunding to tap their target audience as a source of funding, but dedicated customers can now become owners in addition to brand ambassadors.
As we discussed in our previous chapter, What Is Crowdfunding?, crowdfunding is the ability for businesses to raise small amounts of funding from a large number of sources. Depending on the type of crowdfunding platform, the investors could receive a product or service in exchange for their participation in the campaign, or they could receive interest income, equity, and more.
In this article, we continue our ultimate guide to crowdfunding with the benefits this strategy can offer businesses, creators, and investors.
Benefits of Crowdfunding for Businesses
The rise of crowdfunding has benefited many startups and businesses, essentially becoming a new and improved business model. Businesses are able to reach new audiences while simultaneously raising capital, two vitally important aspects of growth.
Below are some top-level benefits that crowdfunding has enabled for startups, established businesses, and more.
Increased Access to Funding
Probably the most obvious reason entrepreneurs and creators pursue crowdfunding is the ability to raise capital through non-traditional means. In the past, businesses had limited options and opportunities to raise money if they needed startup financing, a bridge loan, or growth capital.
Angel investors, venture capitalists, and banks were top of mind among the limited options available to owners and operators in need of funding. Unfortunately, these traditional sources of investment were typically less accessible to international entrepreneurs, women, and minorities.
Today, however, businesses of all sizes, locations, and team composition are able to access funding by launching a successful crowdfunding campaign.
Crowdfunding allows businesses to scale faster, accessing international markets of potential customers and investors. As long as the business’s unit economics are sound, any increase in crowdfunding contributions will simply mean an increase in sales and subsequent scale.
Achieve Proof of Concept
A new product or idea might sound great on paper but only after being introduced to the market will it be proven truly great or not. It has historically been extremely difficult to accurately gauge adoption curves or demand levels for these new, unproven products and ideas.
Crowdfunding is one way to solve this problem by allowing the public to essentially vote on the novel ideas being brought forward. A campaign met with positive feedback and performance validates the idea, without costing the company money upfront.
The opposite is also true — negative reception and feedback from the general public can invalidate the idea before it is physically brought to market, saving the company time and money that historically would have been wasted blindly developing a new idea.
Utilize Viral Marketing
Crowdfunding campaigns take advantage of the viral nature of social media platforms in more than one way. Many campaigns achieve their funding goals because their early backers feel both a sense of admiration for the project, product, or service, but also a loss-aversion bias because in some cases, if the funding goal isn’t achieved, the project will likely not be produced.
Crowdfunding turns your biggest supporters into brand evangelists, preaching to their networks about why this project, platform, company, or idea should exist in the world.
Another benefit of social media for crowdfunding campaigns is the demographic data and lookalike audience capabilities. Once you understand who your early adopters are, you can target other similar audiences through social media advertising.
Benefits of Crowdfunding for Investors
The benefits of crowdfunding extend beyond the creators and companies being funded, but also help investors, both individual and institutional.
If a venture capitalist is considering an investment, a successful crowdfunding campaign can be a very positive signal that the company has the ability to execute and has seen early signs of product market fit.
When venture capitalists make an investment, they are betting the team has the ability and motivation to execute their vision while convincing others of this new reality. A successful crowdfunding campaign can indicate this ability on a smaller scale. Crowdfunding also offers invaluable experiences for companies to learn from their marketing and manufacturing mistakes, plus much more.
Depending on the type of crowdfunding used — whether donation-based, reward-based, debt, or equity-based — the individual supporters, backers, or investors will also benefit.
Crowdfunding as a voting mechanism allows people to have a voice in the types of projects, products, services, and creators they want to see in the world. This gives people a sense of contribution, belonging, and purpose.
In equity-based crowdfunding campaigns, advocates become owners and truly feel a sense of inclusion.
Disadvantages of Crowdfunding
This guide to crowdfunding certainly wouldn’t be complete or free of bias if we didn’t include some of the drawbacks to crowdfunding.
Depending on the terms established by the crowdfunding platform, the campaign could be required to reach 100% of their goal or risk losing all contributions. Even if 99.9% of the funding goal was raised, all backers would be refunded.
Other crowdfunding platforms take a large percentage of the funds generated, therefore limiting the amount of total funding actually received. Kickstarter, for example, takes 5% of the total raise and charges a transaction fee of 3% + $0.20 per pledge. Instead of a percentage fee, some platforms charge a flat rate fee or a standard subscription fee, which is more effective when raising large amounts of money.
Resource- and Time-Intensive
Successful campaigns require a lot of personal devotion, in terms of time, effort, and money. Entrepreneurs will spend a lot of time and money creating and running their campaign, convincing videos, and persuasive content to sell their idea.
Platforms like EquityNet and Crowdfunder, however, have spent years developing advanced tools to automate and streamline much of the crowdfunding process.
How Can Crowdfunding Benefit You?
It’s clear that the advantages of crowdfunding outweigh the disadvantages. Not only does crowdfunding unlock an additional avenue for raising capital, but it unlocks this opportunity for everyone indiscriminately.
Crowdfunding also allows entrepreneurs to receive funding based entirely on their idea, a traditionally tough stage in the company’s life to raise significant funding. In equity crowdfunding, loyal customers and believers gain ownership, which serves to strengthen their loyalty, resulting in significant word-of-mouth marketing.
If you’re interested in benefiting from crowdfunding as an entrepreneur or investor, EquityNet has helped thousands of companies and investors connect to build valuable businesses together through equity-based crowdfunding campaigns — sign up to learn more.
Continue reading to learn more about how to crowdfund successfully in chapter three of our ultimate guide to crowdfunding.