Traditionally, entrepreneurs need to either finance their new startup on their own or seek investment from a wealthy individual or firm. Both offer advantages, but the 21st century has introduced a new option to the mix: crowdfunding. Crowdfunding may be defined as seeking several smaller financial contributions instead of one larger one to launch a new company. This article is intended to help you identify whether crowdfunding is right for you, so here is exactly how it works.
Going door-to-door seeking private contributions isn’t really a feasible way to start a company, so the idea of crowdfunding hadn’t really existed until the internet proved capable of connecting millions of people. Today, several platforms exist to facilitate your crowdfunding endeavor. The most popular platforms (including Kickstarter and Indiegogo) use a system that allows you to “pre-sell” your product in order to raise the money you need to develop it. The system is called a Rewards Model. The term “crowdfunding” generally refers to this model when used in a broader context, though there are other ways to go about it.
Under the Rewards Model, your financial backers receive your product or service when it’s ready in exchange for the money they put down today. Most major platforms allow you to create a tiered structure to try and incentivize contributions. For example, a $20 contribution might buy your product, but $50 purchases a limited edition version instead. You can also throw additional incentives into the mix, such as the chance to meet you and your employees or even a say in a product’s development.
Getting your idea out there is important, as most platforms place a time limit on every listing in order to ensure a fresh inventory of ideas. If you’re working under anAll or Nothing Model, you won’t get to keep any of the money you raise unless you meet your target. If you’re working with a flexible Model, you get to keep all of the money you raised no matter what, but there’s a catch. Once you accept funds, you are legally obligated to provide the product or service you promised. If you didn’t raise enough money to realistically deliver on that promise, you’ll find your concept buried in litigation before it can even get off the ground.
Advantages of Crowdfunding
Choosing to crowdfund to raise the capital you need allows you to keep full control over both your business’s equity and day-to-day operations. You also get an instant customer base and marketing team, as those who were interested enough to prepay for your product are likely to share their enthusiasm with friends and family.
Properly marketing a crowdfunding campaign also gives you a substantial online presence you can use to communicate with the public and receive constructive feedback on your ideas. It can be a lot of work to get your name out there, but you’ll find that it’s well worth it in the long run.
That said, some entrepreneurs think that crowdfunding is an easy way to launch a business. This is simply not true. Your potential investors will want to know what you plan to use their money for, so you still need to put together a thorough business plan just as if you were meeting with a private investor. You should also plan to absorb some marketing costs in addition to what you need to start your company, so set your fundraising goal accordingly.
Crowdfunding in Action
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