With the rise of crowdfunding platforms such as IndieGoGo and Kickstarter, countless inventors are emerging with their own ideas and innovations to try and garner support and funding from the masses. But what is crowdfunding and how can it help (or harm) your small and medium-sized business (SMB)? Here's a look at how crowdfunding works, some of the successes of crowdfunding, and what to consider if you're interested in getting started and building a direct relationship with your customers.
What is crowdfunding?
Crowdfunding is essentially a mix of venture capital, banking and public relations. Rather than going to a bank or venture capitalist and pitching an idea for seed funding, you can produce a video or presentation about your product, service or idea and then pitch it to the world through a crowdfunding platform. Interested parties can pledge money in return for updates, merchandise or early access to your goods or services, if and when you succeed in developing them. It's a way to simultaneously gauge interest, network with partners, build your brand and gain seed funding without high interest rates or loss of equity in your business. It also cuts out the expensive financial middleman. Some crowdfunded projects sell equity in a business rather than products, democratising investments and opening new opportunities for both SMBs and individual investors alike. A large number of people pledge a small amount of money each rather than asking a few people for large sums.
When you start a crowdfunded project, you need to explain everything. The risks to your business idea, current goals, as well as what you will offer those who choose to back your project. Transparency is key, as your customers will depend on the accuracy of your information to make a pledge. Serious complications can occur if you miscalculate your costs, make an error in the delivery date or lower expectations in any way.
The successes of crowdfunding
For the right business with the right ideas, crowdfunding can offer an extremely lucrative way to develop interest, gain publicity and raise money. In Singapore alone, many firms have gone down the crowdfunding route to incubate ideas and products. Many unique ideas make their way to Kickstarter and other platforms with great success, raising thousands of dollars in their first run with minimal risk to the business owner.
On the crowdfunding network CoAssets, a toy manufacturer raised more than S$200,000 in less than 30 minutes for its manufacturing business. It offered equity in its business to thousands of investors. Projects such as these attest to the value crowdfunding can offer businesses to start new ideas, build new relationships and fund new projects without a single loan or complicated investment round. It leaves the business to focus on its product or service.
The challenges of crowdfunding
While crowdfunding offers many advantages, it also has some disadvantages. It's bad enough to have unhappy investors if things start to turn sour, but it's even worse if all those investors are also customers, demanding a product they were promised and sharing their frustration on social media. There are also other regulations and legal issues to keep in mind when crowdfunding as there are strict rules, especially when you crowdfund by offering equity in your business.
If you scale up your business too quickly, handling it can become difficult and there's no way to control the growth once you tap into the masses, drawing in thousands of customers through viral marketing. Crowdfunding offers great access to funds and publicity, but if things don't work out, reputational damage can also occur.
Remember, crowdfunding is just the beginning for any business interested in gaining access to new funds and partners. If your business is considering the advantages of a crowdfunding service, then it must consider the disadvantages as well before venturing down this path.