The crowdfunding industry is growing at an exponential rate. Worldwide the industry has grown to $34.4 Billion in 2015. It is now one of the fastest growing industries in the world.
Crowdfunding covers a broad spectrum of financing methods from peer to peer loans to equity and business loans.
Here we’re going to look at one particular method we can use crowdfunding for – launching a new company or product.
Traditionally a company with a great idea but no existing business would have to rely on venture capital or angel investors in order to launch their company. Angel investors and venture capital firms would tend to take a large stake of the company 40% and upwards to give themselves the highest potential rate of return at the lowest level of risk. Getting a business loan from a bank for a new product, company or service is almost impossible.
Now, thanks to crowdfunding, we have different options.
If your idea is revolutionary and your business is already at an early growth stage you can explore equity crowdfunding options. This means that you will cede some part of your company in exchange for capital. Typically most equity releases offer around 15% of the business in exchange for capital up to several million dollars – depending on the company valuation.
Most investors in equity arrangements will want to see an exit strategy that will realise them around 10 times around their original investment. Alternatively they will want the company to reach a stage where it can be listed on a stock exchange and the shares will increase dramatically in value.
If you decide to go down this route of capital acquisition you need to meet certain criteria
- You must have an existing business
- You will need to have profits, orders and a trading history to have the most chance of success with this model.
- You need an accurate business plan
- A well-structured business plan is essential for equity crowdfunding. Investors need to see a clear and realistic progression and growth plan for your business.
- You need business data
Business data in this instance will include market data, company trading data, financial accounts and projected expenses and growth costs.
Equity crowdfunding is great if you need to grow your business and already have a trading history. It is less good if you are at very early stages of business development as you will find it harder to attract investors – unless you’re inventing the next iPhone of course!
Rewards Based Crowdfunding
Rewards based crowdfunding is a more realistic financing option for people looking to get a business idea off the ground. With this method of crowdfunding we can develop and bring to market a new product or service by using pre-sales and rewards to encourage people to invest.
In order to get your business idea off the ground you will need
- A Viable Product Prototype: In order to attract the interest of backers you need to have something to give them. This is essentially going to be a product or service – be it a high tech new gadget or a game. In order to use a crowdfunding platform like IndieGoGo or Kickstarter you have to have a demonstrable product prototype.
- Clear Business Costs: In order to use a crowdfunding campaign you need to know exactly how much money you will need to deliver the product to market. This entails design, delivery to backers, business running costs and the costs incurred from using a crowdfunding platform. This ensures you will raise the exact capital to successfully launch your business.
- Great Marketing Material: You will need to create a campaign page and plenty of high quality marketing materials in order to actually attract investor interest. You will also need to create marketing material for third party news outlets so that you can get coverage to boost your campaign efforts.
- Great Rewards: Whilst your product or service is your primary reward successful campaigns need a wide variety of rewards. These can be anything from a simple thank you for a small donation to coming onto a product design team or having dinner with the creators.
The benefits of rewards based crowdfunding are that you can essentially test a products viability before launching and use pre-sales to finance the developmental costs.
In addition successful campaigns attract a lot of media attention – which can help off-set the costs of marketing in the future and make it easier to acquire volume sales.
If you’re considering launching your business using crowdfunding we recommend checking out Crowdfundingwebsites – where you can find a lot of great information on launching your own crowdfunding campaign.