Of all the available sources of business funding crowdfunding is, without doubt, the most misunderstood and misrepresented. Hopefully, this article will help to clarify a few of the more common misconceptions.
Often viewed as a new phenomenon, crowdfunding goes back centuries and millennia – anyone who attends a church or has children at school will be familiar with it in the form of "new roof campaigns" or fundraising for computers (these are social crowdfunding, more of which later).
Perhaps the most visible and globally recognised crowdfunded project is the Empire State Building in New York; construction was crowdfunded in 1961 by pre-selling apartments (that is rewards-based funding).
What has changed and made crowdfunding accessible to businesses is the extensive use of online platforms to manage and promote your project – this makes it far more accessible, whilst also making it easier to be invisible!
Probably the most dismal misrepresentation of crowdfunding is when it is offered in response to a struggling business that has failed to get commercial funding.
The reality is that – done well – crowdfunding can produce extraordinary results, but for every runaway success, there are a thousand dismal presentations sitting unloved and unfunded at the bottom of the page.
So, what is the difference between a runaway success and a flop? First and foremost, the crowd.
For the most part, businesses don’t have a natural crowd, it’s something that needs to be worked on very hard before you launch your campaign.
Your crowd needs to identify in varying degrees with you, your product, your ethos, your cause and, above all, your brand. Ideally, they should also have deep pockets!
One business that uses crowdfunding to great effect is the Scottish brewer and pub owner, Brewdog. They have invested a huge amount of effort, time and money in building a crowd who are loyal to the product, the company ethos and its Scottish heritage. On the back of this, they have completed multiple successful crowdfunding rounds.
Meanwhile, accounting software firm FreeAgent took a slightly different approach. They nurtured a network of accountants who believed in the product and many were keen to recommend to their clients that they invested in the business when they raised money through crowdfunding.
So, in a nutshell, your crowd is by far your greatest asset when it comes to crowdfunding. Unlike corporates who have systems and processes, the crowd is a wide bunch of people, and people are simultaneously irrational and predictable in their behaviour.
In many cases, that funding will have come from a headline sponsor, someone whose name or credentials will resonate with your crowd.
At its simplest, it might be you – the owner of the business, giving a clear and quantified signal of your faith and commitment in the business.
Alternatively, it might be someone (possibly a group of people or organisation) who are engaged with your target market, or who are synonymous with the industry.
Whilst a sponsor isn’t essential, it does help with the instincts of your crowd in that it gives a reason and a lead, which every person loves.
To put it into categories, there are four main types of return you might offer, being:
Very few platforms will bring an engaged crowd to you (other than debt-based), those that do will operate in small, clearly defined niches. They will however respond to the noise and encourage your crowd to engage and invest.
There is a huge range of platforms to choose from your selection should be informed by your crowd, your sponsor(s) and your type of return.
Ultimately, as with any business purchase, you get what you pay for. If you just want somewhere to "park" your pitch, one of the cheap/easy ones may well suffice. If you are looking for engagement and support, you will have to pay for the privilege.
Put your effort into building a loyal and committed crowd – give them a reason to want to invest and the world is your oyster.
Often viewed as a new phenomenon, crowdfunding goes back centuries and millennia – anyone who attends a church or has children at school will be familiar with it in the form of "new roof campaigns" or fundraising for computers (these are social crowdfunding, more of which later).
Perhaps the most visible and globally recognised crowdfunded project is the Empire State Building in New York; construction was crowdfunded in 1961 by pre-selling apartments (that is rewards-based funding).
What has changed and made crowdfunding accessible to businesses is the extensive use of online platforms to manage and promote your project – this makes it far more accessible, whilst also making it easier to be invisible!
Probably the most dismal misrepresentation of crowdfunding is when it is offered in response to a struggling business that has failed to get commercial funding.
The reality is that – done well – crowdfunding can produce extraordinary results, but for every runaway success, there are a thousand dismal presentations sitting unloved and unfunded at the bottom of the page.
So, what is the difference between a runaway success and a flop? First and foremost, the crowd.
The crowd
One reason that Churches and schools are naturally adept at crowdfunding is that they have a natural, instinctive and vested crowd, mostly in the form of congregation or parents, but also in the wider community.For the most part, businesses don’t have a natural crowd, it’s something that needs to be worked on very hard before you launch your campaign.
Your crowd needs to identify in varying degrees with you, your product, your ethos, your cause and, above all, your brand. Ideally, they should also have deep pockets!
One business that uses crowdfunding to great effect is the Scottish brewer and pub owner, Brewdog. They have invested a huge amount of effort, time and money in building a crowd who are loyal to the product, the company ethos and its Scottish heritage. On the back of this, they have completed multiple successful crowdfunding rounds.
Meanwhile, accounting software firm FreeAgent took a slightly different approach. They nurtured a network of accountants who believed in the product and many were keen to recommend to their clients that they invested in the business when they raised money through crowdfunding.
So, in a nutshell, your crowd is by far your greatest asset when it comes to crowdfunding. Unlike corporates who have systems and processes, the crowd is a wide bunch of people, and people are simultaneously irrational and predictable in their behaviour.
The sponsor
It is a badly kept secret that most of the fully-funded projects boasted about on platforms actually come to the platform part-funded. Some platforms actually insist that you pre-fund x% before listing.In many cases, that funding will have come from a headline sponsor, someone whose name or credentials will resonate with your crowd.
At its simplest, it might be you – the owner of the business, giving a clear and quantified signal of your faith and commitment in the business.
Alternatively, it might be someone (possibly a group of people or organisation) who are engaged with your target market, or who are synonymous with the industry.
Whilst a sponsor isn’t essential, it does help with the instincts of your crowd in that it gives a reason and a lead, which every person loves.
The return
No matter how loyal, committed and wealthy your crowd are, they will want something in return for their investment. That something can range from a warm fuzzy feeling of goodwill to hard cash.To put it into categories, there are four main types of return you might offer, being:
- Social – payback comes in the form of satisfaction in helping a good cause – as previously mentioned, schools and churches are regular users of social rewards. It is still important to offer clear, ideally visible outcomes wherever possible. Guildford Cathedral was crowdfunded after WW2 with a "buy a brick" scheme. Whilst useless to them, their crowd identified with the concept of owning a brick above the concept of helping to build.
- Rewards – payback comes in the form of goods or services, usually but not always in the form of your own product. So if you are starting a brewery, the reward might be xx bottles of beer each year. In the cited example of The Empire State Building, the rewards were rather more valuable and came in the form of an apartment. ($10K investment would be worth $800K today).
- Equity – the return comes in the form of shares hopefully yielding dividends and profit on exit. Unlike corporate investors, your crowd is unlikely to want detailed information, fees or any form of involvement.
- Debt – This is somewhat different from the above three in that most of the platforms behave in a very similar manner to commercial providers – they have their own underwriting criteria and their own crowd.
The platform
You don’t have to use a platform, it is entirely possible to run your own campaign personally – but there are potential benefits in using a platform for conformity, visibility and perception. They can also augment your existing crowd.Very few platforms will bring an engaged crowd to you (other than debt-based), those that do will operate in small, clearly defined niches. They will however respond to the noise and encourage your crowd to engage and invest.
There is a huge range of platforms to choose from your selection should be informed by your crowd, your sponsor(s) and your type of return.
Ultimately, as with any business purchase, you get what you pay for. If you just want somewhere to "park" your pitch, one of the cheap/easy ones may well suffice. If you are looking for engagement and support, you will have to pay for the privilege.
Conclusion
Crowdfunding can be a fantastic way to fund a business, but it is neither an easy way nor a "lender of last resort".Put your effort into building a loyal and committed crowd – give them a reason to want to invest and the world is your oyster.
