A beginner's guide to crowdfunding

The biggest hurdle threatening the success of most start-ups is the ability to attract funding. Finding a way to fund the early stages of your business can be tricky for a business of any size. One of 2012's biggest alternative funding platforms was crowdfunding, and it could be the perfect solution should you find yourself in this position.

In this week's blog, we will explain what crowdfunding is, how it could benefit you, and how to make the most of the platforms available.

What is crowdfunding?

In essence, crowdfunding is an online platform that allows many different people to donate capital to your project in return for some kind of reward. While there are many different platforms available such as Kickstarter,  Indiegogo and RocketHub, they all work in a similar fashion by allowing the project creator to create a profile including a video, then upload a short description of their project, an investment target, a list of rewards per donation and any other supporting images they feel will help convince potential investors.

Donation-based Crowdfunding
This model was initially incredibly successful in the creative industries, which often struggle for investment through traditional mediums, as it created a platform that allowed them to showcase their creativity directly to those with the cash to invest in an open, informal environment. Musicians also latched onto the idea, funding new albums or tours by asking fans for donations of varying amounts in return for private concerts, signed merchandise or the opportunity to provide backing vocals for a new recording.

Reward-based Crowdfunding
Often tied in with donation-based projects, this has been successful as it eliminates much of the risk for donators by getting many people to pledge a small amount, while in most cases they also receive some kind of benefit very soon after investment. It is generally assumed that projects that 'tell a story' that the potential donor can empathize with and buy into will usually fare the best in the crowdfunding world.

The majority of platforms require you to reach your funding target before the pledge is confirmed, and once reached they will take a small amount of commission - usually around 5 per cent.

 

How can crowdfunding benefit you?

One of the biggest plus-points of crowdfunding - other than the potentially fast raising of the capital itself - is that it creates an extremely strong network of support for your idea from an early stage. Those that invest are more likely to act as brand ambassadors, singing the praises of your project to those in their network. They may also offer to lend a hand and offer any particular expertise they may have that could be beneficial to you, and become returning customers themselves.
 

Also, with crowdfunding being the media's alternative funding platform du jour, a highly successful campaign is a great way to raise wider awareness of your start-up too. Local and national press are more likely to feature your success story, and future investors and customers can plainly see that the public have faith in you and your product or service. In the case of funding a new product for the market, crowdfunding also gives you the opportunity to pre-sell before taking it to market, giving you the opportunity to gauge public reaction to it in advance.

If you sell your story well and you are providing a product or service people can really get behind, it is possible to meet your target incredibly quickly.

How can you make the most of crowdfunding?

Speaking to Forbes, Tany Prive, co-founder of the American crowdfunding platform Rock The Post, said:

"There are three main reasons why people unconnected to a project or business would support it:

1. They connect to the greater purpose of the campaign
2. They connect to a physical aspect of the campaign like the rewards
3. They connect to the creative display of the campaign’s presentation"

Clearly then, ensuring your campaign connects on at least one (and ideally all of these points) is key to it being a success, and it is easier said than done. While there have been some overnight-success stories since crowdfunding rose to popularity, this is not the case for the majority of entrepreneurs. A lot of hard work and creativity is needed to make it a hit - you can't just upload your campaign and sit back and wait for it to go viral.

If you decide that it is the funding option for you, spend a little while assessing all of the available options to see which suits your brand best and you feel is the most likely provide you with the level of funding necessary. Take a look at some of the existing campaigns - those that have worked and those that haven't - and work out what made the former more appealing to the public than the latter.

You also need to make your campaign look as professional as possible to create the confidence in potential investors that you can deliver what you are offering. This includes everything from getting your copy proofread, to the quality of your images and the finish of your video - the more you get right, the better chance your business has of receiving funding through this platform.

Remember, you have to be ready and able to deliver once you are successful in getting the funding...

What are your crowdfunding platform options?

Here are some of the most highly recommended sites in the UK's crowdfunding platform market:

Kickstarter - The original crowdfunding platform for the creative community.

Indiegogo - Rewards based like Kickstarter, with few restrictions on the kind of campaigns uploaded.

Quirky - Aimed predominantly at inventors, designers and engineers.

Crowdcube - Differs from other options as it offers investors equity in return for a small investment.

Peoplefund.it - Started by the team at River Cottage, this site specialises in grass roots community projects.

As of April 2012, based on Crowdsourcing.org’s Directory of Sites, the most complete database of crowdfunding sites, there were 452 crowdfunding platforms active worldwide. The majority of them are in North America and Western Europe. Together, these platforms raised almost $1.5 billion and successfully funded more than one million campaigns in 2011.  The UK has the second largest number of crowdfunding platforms in the world and the topic is in the forefront of many newspapers and websites today.

However, there is a wider conversation we aim to have about Crowdfunding over the next few weeks.  It is important to note that with any type of funding there will always be a need for due diligence for all parties involved.  More stories on this and other trends in upcoming  blogs.