Why Crowdfunding is one of the Best Sources of Business Finance
One of the biggest challenges for many businesses is accessing capital. Traditional financial institutions such as banks generally do not lend money to ventures which don’t have a profound history in terms of annual revenues and the number of years in operation. Crowdfunding offers an opportunity for entrepreneurs to fundraise from a global audience that has far less requirements than the formal institutions. Here are 5 reasons why crowdfunding is one of the best sources of business finance.
- It is less complicated than the traditional sources
Pursuing business capital from the traditional sources of funds is usually a very painful process. Institutions such as banks, venture capitals, angel investors, etc. often require a business to have been in operation for a certain number of years, and within those years – its financial figures to have met a certain threshold. They also like to hold on to some form of leverage in case things go downhill. Well that is not very ideal for startups and SMEs.
Raising capital by crowdfunding is much less complicated because the investors generally have less requirements. They care more about the idea and where it is headed to, than its historical figures. And it’s pretty easy to get started, you just need to set up the campaign through online platforms such as Kickstarter or Indiegogo and the business idea will be instantly visible to thousands of prospective investors globally. The more creative the campaign (and the business concept), the more likely it is to meet or even exceed the funding goals.
- The possibility to raise A LOT of money
Crowdfunding gives entrepreneurs the opportunity to raise as much money as they need. It also often happens that a business exceeds its fundraising goals. The success of a campaign depends on how exciting the concept is and how many people believe in it. One of the most popular examples is of the company called Pebble Time – a smart watch maker. Their initial fundraising goal was $500,000, but they managed to raise $1,000,000 in less than one hour. By the end of the campaign they raised a total of $20,338,986. While that may be one of the more extreme examples, it is not uncommon for a company to exceed its fundraising goals. As a matter of fact, several companies do so every day on Kickstarter.
- Social proof
Crowdfunding is not just a source of finance for startups and SMEs, but a highly powerful business validator providing invaluable social proof. The other traditional funding sources such as banks usually have very strict policies for lending money because they need assurances that their money will be repaid. Now, when people invest in a company that has no history, offers no leverage whatsoever, and is not yet making money – that means that they approve the concept. It also indicates that other consumers in the market might buy into the idea.
Crowdfunding investors essentially are the early adopters – one of the most important elements in the growth of a new business. A successful crowdfunding campaign validates a business before entrepreneurs dedicate more time and money on it. An unsuccessful campaign gives a hint that the consumers may not buy into the idea and that some changes have to be made.
- Feedback and ideas
A business that intends to grow exponentially needs to first strongly appeal to its customers. Products that have been designed in response to consumers’ needs are the ones that will sell themselves and be highly successful. Crowdfunding gives the opportunity to connect with early adopters and use their feedback to improve the business. An investment ultimately gives each investor a sense of ownership and responsibility towards the company’s early growth, and they will feel obliged to leave some genuine feedback that could help improve the business.
- It is risk free
Crowdfunding is a great way to fund a business idea without having to give up equity or accumulate debt. And it is free on most platforms. Kickstarter allows you to keep the money you raise only if the fundraising goals have been met. Indiegogo on the other hand allows entrepreneurs to keep whatever amount they manage to raise, but charge a small commission from it.
There are usually no upfront fees, commission is only charged from the total amount raised. It is a win-win situation because even a startup that fails to raise money will not have incurred any significant costs in the process. It will instead acquire useful feedback – for free. Crowdfunding is truly one of the best sources of business finance for startups and SMEs.