Crowdfunding is hot, kick-starting not only our companies but entire economies. It is the go-to miracle measure to create ambassadors, marketing, money and products out of nowhere.
These expectations came into existence after major crowdfunding successes, like that of Pebble Watch. There are different types of crowdfunding however, and each type of crowdfunding benefits a specific type of company or a specific need within that company. Let’s look at the differences to get a grip on how crowdfunding can help your start-up!
Much of what people expect banks to do has been replaced with bottom-up initiatives, like peer-to-peer lending. As an entrepreneur, it is easy to understand: The money you receive is not yours, you’ll have to pay it back to the many investors who then benefit from the interest rate the entrepreneur proposed. Though understandably for the lender and therefore easy to sell for the entrepreneur, lending brings some potential problems. It may hurt your cash flow, you might not be able to pay back the loan as soon as you expected, or the company goes bankrupt and you have to pay back the debts yourself. Finally, it doesn’t increase the value of your company as the money isn’t owned by you.
Lending can be beneficial for companies that expect revenue in the near future and companies with a good solvability. However, if the bank didn’t give you the money, it might be wise to double check with your account before asking the crowd for a loan.
Donations and Reward-Based Crowdfunding
These hardly need an explanation. Donations are very valuable for your company if you want to increase your company’s image (think about“Food-for-Africa”-run with your employees or setting up schools). Reward-based campaigns are valuable because you can test people’s willingness to purchase your product, test the product, and of course train your own marketing skills. And of course, as a start-up, you probably need the cash. Also, being able to add revenue and products sold to your investment or loan offer, donations increases the chances an investor or a bank will give you money.
The major drawbacks are that the product has to be as good as ready to produce. In order to do that it’s often required that you create a prototype for which you need, you guessed it, money. Unless you have a very good prototype or a product that doesn’t require one, it’ll be hard to convince the crowd to invest. Because these two forms of crowdfunding are so popular, there’s also the chance that you might drown in the offers that would-be backers are confronted with. Marketing is the key with this type of funding.
Equity crowdfunding in Europe has been in development for the last four years in the US, and has been practised in Europe during that time. It turns out to be a tough nut to crack. Not only legally but also because “buying a company” is not what the majority of people do on a daily basis. Even if they have the general knowledge of what the meaning of being a partial owner of a company is, the entrepreneur will still receive a lot of questions about the equity crowdfunding platform, the legal aspects, the expected ROI, and so forth. It requires the entrepreneur to have a well thought plan and an even better (and understandable) pitch.
On the bright side, raising funds via equity crowdfunding will increase the value of your company. You’ll have more access to knowledge, networks, additional money in a later stage, and you will create stakeholders that help you promote the company. Also, the investors and the entrepreneur establish a long-term meaningful relationship. Thinking about another round? Chances are your old investors will want to be there first: higher the investment, higher the involvement. Finally, your solvability will be improved, increasing the chances of a loan, if needed. Be sure to double check the safety of the platform however, by seeing who the financial and legal partners of the equity-funding platform are and whether or not they are CAPS-accredited.