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The fundamentals of crowdfunding for startups!

 

Crowdfunding can be a great alternative for startups to raise funds!

 

 

Convincing investors to put money in your project might not always be an easy task, bank loans can be very expensive, and not everyone has personal savings enough to start their own business. Crowdfunding can be a much more convenient option for those who are starting or are looking for an unconventional way to fundraising.

 

You've probably heard about success cases like the Veronica Mars movie, Pebble watch, and the FORM1 3D printer, among others. And we will explain all you need to know before launching your first successful crowdfunding campaign!

 

What is crowdfunding and how it works?

 

In essence, it is a way to raise funds for your project through smaller contributions from a large group of individuals, instead of trying to get all the necessary amounts from fewer investors. It’s like throwing a dinner party with everyone who wants to participate in contributing a little bit.

 

You will present your idea and business model to investors in a crowdfunding platform. As in any pitching, you must be persuasive to convince funders to invest in your project, offering a down payment in exchange for something, that is called fulfillment.

 

It can be used by several kinds of businesses, and of every size. Creative professionals, NGOs, non-profit organizations, and startups. Some successful 2019 crowdfunding campaigns are listed here, and it includes sports clothing, smart glasses, and portable batteries!

 

What are the pros and cons of crowdfunding?

 

Among the reasons that many entrepreneurs turn to crowdfund as a way to kickstart their project are:

 

  • Much less bureaucracy than banking loans. You don’t need to prove your credit history, for example
  • Access to micro investors and consumers who believe in your idea. That’s a confidence boost, no?
  • More exposure, thus more public interest. You get the chance to connect and build a community and customer-base.

 

On the other hand, some cons get in the scene. As crowdfunding agreements are not necessarily monetary, it doesn’t allow much room to handle unpredicted situations. If you promise a product or service as a reward, but the project fails you might have to return everything. In this case, all the hard work won’t be paid off.

 

Another thing to take into consideration is how much of the funds will stay with the crowdfunding platform, as most of them charge fees. Getting investments includes paying it back, no matter if from a bank, venture capital firm, or crowdfunding, so it’s important to analyze all conditions carefully.

 

Now that we have probably convinced you that it’s possible to raise the funds you need for your project, let’s see the different ways to do that.

 

How many models are there for startups?

 

There are different models of crowdfunding, suitable for a variety of projects.

 

There are mainly 5 crowdfunding models suitable for startups, allowing funders to profit from it or just a simple donation. Let’s discuss each of them, so you’ll understand and have an idea of which the crowdfunding model is best for your project.

 

Donation-based 

The name is self-explanatory. This model is commonly used to raise money for community causes or personal needs and can be used by charity and other non-profits organizations. Some examples of projects to be funded with donations are: building a park in the neighborhood or supporting an animal shelter. The Amurtel Group helps refugee mothers and children in Greece through crowdfunding donations.

 

Equity-based 

Working as a stock market, equity crowdfunding allows funders to profit from business growth too. The business owner signs a contract compromising to provide equity to the shareholders, and giving the money back if the business doesn’t succeed.

 

This model implies publishing financial and business reports to keep the transparency and includes specific regulations, though it’s not the same as going public. Equity is more recommended for businesses seeking large amounts of investments.

 

Reward-based 

People will donate money and in return, they expect to receive, well, a reward. You don’t necessarily need to send them the product itself, it could be any kind of perks and gifts, but make sure it really feels like recognition and gratitude for their support.

 

Debt crowdfunding

Also known as peer-to-peer (P2P), is like a loan. People will lend you money under predefined conditions, which can include interests and timelines. It’s not like equity or reward crowdfunding, as you’ll only have to pay them back according to what has been determined in the agreement. 

 

Pre-sales model

Works in a similar way as the reward-based crowdfunding, but normally it has a minimum amount for contributions based on the cost of production. And yes, in this model you have to deliver the product since people actually bought it.

 

What does it take for a successful crowdfunding campaign?

 

Crowdfunding is part of your strategy, right? So it has a financial goal, a cost, and a time frame. Have it really clear how much you need to take your project off the paper, considering the time and cost of production, and what has been agreed with your funders and platform.

 

It’s never too much to say: do your research! Check each platform and analyze their offers, their audience, and what kind of project has succeeded in there. Why was their pitch so compelling? How they provided fulfillment successfully to their backers? 

 

Thinking about the models mentioned above, think about how it would be to ship rewards or even your own product to all five continents. Focus on offering digital products, instead, like books, games, streaming services, exclusive access to services, and so on to save up money.

 

Remember they charge fees for the exposure and you need to know how much it will cost you. So, don’t rely only on the crowdfunding platform exposure, you should advertise your project on social media to increase your chances and start building a community.

 

Create a content calendar to fit the time frame of your campaign, sharing information about your niche, product, testimonials, press releases, and anything else that could be interesting to your target audience.

 

How to prepare and present my business plan?

 

A business plan is a document indicating what the project will achieve, how it will attain, and the expected time of completion to each phase. We have already presented how a good business plan looks like here, but for a crowdfunding campaign, it can be a bit simpler.

 

The perfect business plan will present the product value in a very straightforward way. People should be able to understand within a minute. What are the problems your product solves? Why does it make everything so convenient?

 

Tell a good story. Show the crowdfunding community you have the expertise to make it happen. And in the best possible way! Tell them how you came up with the idea, how do you relate with it in a personal way, as you need to establish a connection with the audience.

 

As a more technical part of your plan, make sure to clarify how the magic will happen. That’s your product roadmap, including the necessary steps to accomplish what you are promising. Which technologies will be applied? Which tools do you need for that? When will you do it?

 

You might spend a few weeks coming up with the perfect version of your business plan, but it will worth it when you see how much funds you can get with a good pitch!

 

The top crowdfunding platforms for startups

 

Every crowdfunding platform offers specific conditions to qualify the projects to receive funds, and give them visibility targeting their audience.

 

Every platform has an orientation of which crowdfunding model they support, as well as fees and conditions. So, we made a list of the most known crowdfunding platforms and a quick overview, so you know what to look for when starting looking for the best one.

 

Kickstarter

It’s one of the most known platforms, and it works with reward-based crowdfunding. They charge a 5% fee of the total earned. It has supported creative artists to technology projects, like the Fitbit smartwatch, my Pebble watch

 

Indiegogo

Works in a very similar way as Kickstarter, reward-based, and a 5% fee on all the funds raised. Successful projects include restoring Martin Luther King Chapel, Ubuntu Edge, and Flow Hive

 

I Fund Women

Focused on supporting female entrepreneurs, this platform is also a reward-based. IFW sticks to the 5% fee on the total funds, and backers can pay with Paypal or Stripe. The biggest differentials are the free coaching and the “Pay it Forward” model. The I Fund Women reinvest 20% of their fees in campaigns that are closer to success.

 

Go Fund Me 

In Go Fund Me backers are actually donors, as this platform is focused on charity, medical, and memorial projects. It’s also free of charge, except for the transaction fees, including credit cards. It’s only available in 19 countries, mainly in Europe.

 

Kiva

In Kiva, crowdfunding campaigns are debt-based, meaning they are repayable loans. The platform established a minimum of 25 dollars per loan, and borrowers have up to 30 days to raise the necessary funds. 

 

SeedInvest

That’s an equity-based crowdfunding platform. In this case, your backers actually own part of your company, a.k.a shareholders. SeedInvest is perfect for early-stage startups in the tech industry willing to raise at least 500,000 dollars. One of the requirements is to have already a minimum viable product or proof-of-concept.

 

Of course, there is a wide range of platforms available, like Crowdfunder, Patreon, and Fundable. We just presented a few options and what are the requirements and costs from each of them. The ideal is to look for platforms that provide access to your target market, and that offer suitable funding conditions for your project.

 

From idea to conception

 

Taking your idea from paper and turn it into a real product or service, that’s a long road. Not only it required a lot of planning, but you also shouldn’t discard the possibility of adapting the project according to customers’ feedback.

 

The Coolest Cooler failed in its first campaign. Ten months later, it was considered one of the most successful crowdfunding of all time. The team learned from the first experience and came back more prepared. And its final disaster should also serve as a lesson: brands should keep their words.

 

Crowdfunding can be an incredible solution to raise the money you need, but it’s also a lot of work and responsibility. That’s why we offer courses and group coaching for entrepreneurs in all stages: just starting out with an idea, and those who are looking to improve their businesses. Book a GPS assessment now!

 

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