Crowdfunding is not a new concept. With many new entrepreneurs and businesses blossoming daily, it is worth looking at the essentials needed to procure the necessary funding.
What is Crowdfunding?
First, we need to know what Crowdfunding is. It is the process of financing a new business venture by raising small amounts of capital from many individuals.
Crowdfunding is a financing option that operates outside of banks and other traditional lending institutions. No credit check or collateral is required; all you need is a good idea.
Types of Crowdfunding
There are four basic types of Crowdfunding:
Rewards based – This model is beneficial to those who manufacture products. By investing in your company, individuals gain access to pre-orders of your invention. This pre-order normally has a discounted price compared to the future retail value.
Non-Profit/Fundraising – We are familiar with firms such as GoFundMe and Indiegogo. They fall under this category. This involves receiving help through donations either directly or on behalf of another.
Equity – This type of Crowdfunding requires that you issue shares of your company in return for investing. Some examples of products in this category are hardware, apps, fashion, and software.
Real Estate – This model is used to raise money for residential or commercial development. This is excellent for unaccredited investors to pool their resources and purchase property for income purposes.
What you need to do
Contrary to popular belief, Crowdfunding is more than having an idea and waiting for investors to show-up. It involves extensive planning on your behalf.
- You need to determine your fundraising goal. This is the amount needed to bring your product to market. Your target goal should be the minimum amount needed to bring your invention to fruition. This strategy will ensure you meet your target faster and increase the chances of you being over-funded. When you become over-funded, you create hype in the marketplace and more investors become interested.
- The length of the fundraising campaign needs to be established. On average, this lasts between 30 and 45 days. The duration can vary according to your needs. The purpose is to create a sense of urgency for potential investors.
- You must create a campaign or pitch video for your product or service. This campaign should include pictures and images of your product. To be more effective, it will show individuals using the product to add credibility. Think of it as a commercial instead of a business proposition.
- Establish whether your collected investments will be “keep what you raise” or “all or nothing”. This determines if you get to keep or return the invested monies in the event your goal is not met.
You should focus on the “crowd” portion of crowdfunding. Marketing is essential to your success. A community should be built around your product prior to launching it. You need to maximize your social media presence and get others familiarized with your creation. These are the individuals who will assist in sharing your idea.
A crowdfunding campaign is also designed to test and refine your product prior to public release. This is the period where you will discover who your potential customers are. Use this time to learn what features they gravitate to and adjust if necessary.
Unfortunately, Crowdfunding campaigns should be used to confirm if there is a demand for your product. You may believe that your idea is great but the public-at-large may have a contrasting point of view.
It is worth noting that governments and financial institutions may utilize the success of crowdfunding campaigns. They use this data to test the demand and credibility of your product. You may consider this in the event you seek expansion and additional financing from these entities.
In the event you raise more money than targeted, remember that you cannot pocket the extra cash. You are obligated to produce and provide the product as this is what the investments were for. Your work begins, not ends, after you receive your funding.
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