Crowdfunding is no longer the new kid on the block. Over the past decade, this method of fundraising has become a popular choice for small to mid-size businesses, nonprofit organizations and start-ups alike. With such a rapid increase in use, however, crowdfunding has come with its fair share of misconceptions surrounding how it works and who can use it in a meaningful way. Here we discuss the most common myths in the world of crowdfunding, and provide a clear depiction of what this billion dollar industry is truly about.
#1 – If You Build It, Funders Will Come
Without a doubt, the perception that simply slapping together a crowdfunding campaign will quickly lead to funders flooding your business with capital is far from a reality. Although this method of raising capital is a viable way for a wide range of businesses to gain much needed funding, the crowd is not simply lying in wait for the newest campaign with checkbooks in hand.
Those investors who are more likely to fund crowd-based projects do not materialize out of thin air. Just like with organic growth of a business, word of mouth is the most powerful source of new money, either through direct investment by venture capitalists of angel investors, or by way of purchasing a company’s products. Once a business has made the decision to utilize crowdfunding as a capital-raising platform, it must be ready and willing to put in the work to get investors not only interested in the campaign, but aware of its existence. Having a solid foundation of social media and e-mail outreach strategies can help create a buzz surrounding a new crowdfunding campaign, and these aspects are the true ‘magic’ behind successful, sustainable crowdfunding implementation.
Businesses also need to be intimately aware of the fact that the majority of individuals who decide to be a part of a business by way of crowdfunding are looking for business missions and philosophy with which they can connect. They are also seeking some sort of reward for their participation, either by way of an incentive such as a return on investment, or a perk like early access to a product release. Not only must businesses take note of what their investors via the crowd want, but they must also put in the work necessary to reap the crowdfunding reward. If businesses build a crowdfunding campaign with this in mind, then yes, the crowd will come.
#2 – It’s all about the Money
Yes, at its core, crowdfunding is designed to raise capital for businesses, whether they are well established, launching a new product, or simply trying to supplement cash flow during periods of cyclical slow down. Campaigns can be much more meaningful to companies as it relates to awareness and marketing, product or operation validation, press, and potential expansion opportunities.
Think about how business growth took place, pre-Internet. Word of mouth, press releases, and print publications helped spread a company’s message to the masses. Although it may have been a much slower process than what the World Wide Web affords, it worked for those who made the effort. Companies made investors and potential customers aware of their products through direct marketing strategies. Now, crowdfunding can produce the exact same effect, but in real time and with lighting speed results. Platforms that allow businesses to crowdfund can help connect interested investors in businesses that they connect with, creating the basis for ongoing, mutually beneficial relationships. If companies are clear about their message and actively promote their campaigns, they can reach those investors that are most likely to invest in their business through the new technology-based word of mouth.
In addition to building awareness for a specific brand or a company’s product, crowdfunding can also validate the core purpose of a business. If a company is concerned about having a market for a certain product or service, building a crowdfunding campaign can be a viable way to test the marketplace. If enough of the crowd participates in the company’s offering, it is a clear indication customers for that product or service do indeed exist. If the crowdfunding efforts are less successful than hoped for, it may mean that a market is too small or simply does not exist for a company to sustain a new product launch or an infusion of capital. In the latter case, the crowd may not be connecting fully with the business mission, and therefore may not see value in investing in the crowdfunding campaign.
Crowdfunding can be a powerful source of connection between investors and those businesses that need them the most. It can also prove to be an intelligent way to test the marketplace for validity of a business model or product. The misconception that crowdfunding is simply about the benjamins – officially busted.
#3 – Timing is Key to Success
There is no perfect time to start a crowdfunding initiative. Period. In fact, timing plays no part in the success of failure of a campaign, no matter the purpose. Why? Investors are not cyclically interested in business operations – those who are willing to invest, based on connection with the business and true interest in the work being done through a company’s operations, will do so when they find the right fit for them. As a business attempting to raise capital through crowdfunding, the right time is whenever the need arises, and when the team players, both within the business and through the chosen crowdfunding platform, are ready to put in the work to make it a success.
#4 – Crowdfunding is Akin to Begging
Crowdfunding is most certainly not the business equivalent of panhandling on a busy street corner. When the need for capital presents itself, businesses must strategically weigh the options for how to raise those funds. Begging is done through desperation; inviting investors to partake in a portion of a business through crowdfunding is in and of itself a completely different animal. It takes planning and partnership with the right platform, as well as effort and time. Those who invest in the business are doing so because they believe in its mission, and their investment fuels business operations per the crowdfunding initiative. The opportunity for the crowd to be part of something is far removed from panhandling via the Internet, plain and simple.
#5 – ‘The Crowd’ is not a Sophisticated Group of Investors
In the crowdfunding world, there are two types of options available to the crowd – reward/donation-based projects and equity-based initiatives. The former, made popular over the last decade through sites like Kickstarter, has, somewhat unfortunately, created the perception that those who “invest” in crowdfunding opportunities are unsophisticated, small fish-type individuals. Typically, these types of campaigns offer a small incentive to take part in the funding of a new product or company, starting at just a few bucks to get in the door.
Equity-based crowdfunding, however, focuses more on providing capital to already established businesses or highly valued start-ups that are in need of funds for ongoing operations. These offerings provide a true return on investment, subject to the terms of the offering as determined by the crowdfunding platform in partnership with the business seeking funding. Investors in this space must be accredited, as defined by the Securities and Exchange Commission, per the JOBS Act of 2012. Accredited investors are those that hold a certain net worth and/or annual income, and have ample experience in the universe of more complex investment options. Although regulation surrounding equity-based crowdfunding is still being fleshed out, it is clear that the idea that crowdfunding only intrigues individuals who are less savvy as it relates to investment opportunities is simply not true.
#6 – Crowdfunding Has No Cost
Wouldn’t it be nice if the money needed for working capital fell from the sky whenever it was needed? It would be difficult to argue that we wouldn’t all be outside with arms wide open, multiple times throughout the year. We all know that isn’t reality, nor will it be any time soon. To think that the availability of capital for business initiatives also magically floods in without anything more than the snap of a finger would be a grave mistake.
Crowdfunding has costs associated with it, including the time and effort it takes to create, implement and maintain a campaign as well as the fees associated with the platform used to bring the crowd to the business. However, the fees do not make it prohibitive to participate in crowdfunding, for either equity or reward-based campaigns, but businesses should be aware of the costs and build those into the budget for crowdfunding initiatives.
The popularity of crowdfunding, in both rewards-based and equity-based strategies, has created a number of misconstrued untruths for business owners who have yet to dip their toes in. The truth is this: crowdfunding is a viable, affordable, sustainable option for businesses seeking funding for new product launches or those wishing to supplement working capital when the need presents itself. Having a clear understanding of the truth behind crowdfunding can set a business up for true success with a crowd of connected, interested and able bodied investors, with checkbook in hand.