What is crowdfunding and what makes it a success?

There is no denying that a start-up’s path to success is a daunting one but there are certain elements that render the better ones poised to realise their potential. A sound business plan, charismatic leadership and a great product combine to form a solid foundation from which a new idea can thrive. However, even a budding company characterised by these favourable qualities cannot advance without first achieving one crucial step – financing.

It is at this hurdle that many promising start-ups fail. The lending processes of traditional financial institutions often render new businesses unable to access capital. One solution to this problem lies in crowdfunding. Crowdfunding is the sourcing of small capital investments from a large number of individuals in order to finance a new business venture. By harnessing a customer base plus the vast reach of social media, crowdfunding expands the pool of investors beyond the conventional group of families, friends and “angel” investors.

Crowdfunding can take a variety of forms depending on the needs of the start-up:

  • Donation: Donation-based crowdfunding pertains to the investment of capital by investors who expect nothing in return. They invest purely out of support for the business.
  • Debt: Peer-to-peer lending is a form of crowdfunding whereby capital pledged by investors takes the form of a loan that must be repaid with interest.
  • Rewards: This is an incentivised form of crowdfunding that provides investors with rewards relative to the size of their pledge. Rewards can take the form of merchandise, product samples, or discounts.
  • Equity: Equity-based crowdfunding, the main platform – allows businesses to sell equity in their company in exchange for capital. For their funds, investors receive shares in the business.

The numerous advantages associated with crowdfunding render it an attractive alternative financing option to any new business starters. First and foremost, it provides an opportunity to directly interact with investors and customers who believe in your product. Thus, it allows a business to grow your audience while receiving continuous feedback throughout the development process/cycle. This dedicated investor base widens a product’s horizons through zero-cost word of mouth marketing. Ultimately, crowdfunding facilitates a dedicated community.

The question remains, however, how can you best position your business to realise a good crowd funding campaign? Any successful crowdfunding venture begins with a cost-effective and impactful marketing strategy. This pivots on an engaging campaign video that explains the product and features plus the charismatic founders. This can be enhanced through the inclusion of a launch event and related promotions. In the case of rewards-based crowdfunding, emphasis lies on the creation of a rewards program that maximises return on investment.

The most valuable asset of crowdfunding, however, is not its accessibility but its flexibility. It provides a funding option that allows you to maintain ownership of your business whilst not giving up control. Further, it harbours a lower level of risk and commitment, worst case allowing businesses seeking capital to withdraw if their goals are not met.

It is also important to note that no crowdfunding campaign is guaranteed success. Hence, well considered advisers are paramount. – from the valuation to the back office, seek advice.

To find out more contact Ross Sawczyn, HLB Mann Judd 0419 223242

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