Who does not need capital to run their startup? Most entrepreneurs are always looking for ways to raise funds for their startups. Generally, the best method is to look for investors.
But that’s not the only way of fundraising for startups—crowdfunding has been a growing trend among the startup ecosystem. However, this strategy has both benefits and drawbacks. So, if you’re considering crowdfunding for startup fundraising, keep reading to find out if it’s a suitable fit for you.
How to Raise Funds Through Crowdfunding?
As the name suggests, crowdfunding is a process of raising funds through the general public. They could also be your target audience, the pool of early adopter investors, or anyone who believes in your vision and is willing to give you financial assistance. Crowdfunding investors are often called contributors or backers.
While most crowdfunding is done for a startup with a societal impact, the scope of crowdfunding is more than just a donation. There are other types of crowdfunding, like reward-based crowdfunding, which offers rewards in return for funds; debt (lending) crowdfunding, which raises funds through debt; and equity-based crowdfunding, which offers little equity in return.
Perks of Crowdfunding for Startup Fundraising
Crowdfunding investment has both perks and risks, which one must consider before making the final decision. Let’s first understand the perks of crowdfunding.
1. Your equity remains safe!
In businesses, ownership is a sensitive matter as decisions get made based on the control of equity. Therefore, for early-stage startups or any startup, control over equity is crucial to maintaining integrity and controlling the startup’s operations. Traditional fundraising alternatives involve equity risk in various proportions. That’s where crowdfunding investment sets apart.
Through crowdfunding, startups can raise funds from crowds or small investors without risking equity. They can offer rewards or take debut funds and return them with interest. Thus, your equity stays safe, and you can raise the funds for your operations.
2. Connect directly with your backers
Startup crowdfunding platforms are not just for fundraising; they help you connect with your backers, aka your target audience. Often, startups use crowdfunding platforms to gauge the reaction of the target audience regarding their product. Therefore, through these platforms, you can understand your audience’s needs and demands, get feedback, and communicate with them to engage them with your brand. It helps you optimize your product to accommodate their needs.
3. Get authentic market validation
Crowdfunding for startup fundraising is not a walk in the park. You’ll need a product or pitch that impresses the crowd to give you their hard-earned money. People are picky about where they are spending. Thus, you can get an authentic market valuation of your startup based on the crowdfunding and reviews you get from the crowd.
You can also conduct a product-market fit through crowdfunding. It allows you to fund your research and create an effective product to meet your target audience’s needs. For example, if you are making a product variant, you can ask your users to review the idea and the finance they are willing to provide.
4. Get paid before producing the product
One of the benefits of crowdfunding for startups is raising funds before offering any product. You can represent your vision to users and urge them to pay or cover a part of your upfront cost.
Risks of Crowdfunding for Startup Fundraising
Remember, there are two sides to every coin. Therefore, there are many drawbacks to crowdfunding for startup fundraising that you must consider before you make the final decision.
1. Needs thorough planning
You can’t just wake up one day, sign in on a startup crowdfunding platform, and raise funds. You’ll have to create a thorough plan on what platform to choose, how to promote your crowdfunding efforts, research your target audience, and other intricacies. An entrepreneur has to find the right audience to target and create a campaign targeting them for crowdfunding investment. It’s like writing a movie script based on a book that you have barely read. While experienced startups handle it better, newbies can struggle with finding the right crowd and pitching campaigns to raise funds.
2. No guarantee of raising funds
Crowdfunding for startups is not a magic portal to raise funds. There is a high chance that you’ll fail to raise funds or sufficient funds from the perfectly planned and executed crowdfunding campaign. Startup crowdfunding platforms often have an ‘all-or-nothing’ policy, which means that you can lose all the funds if the goals are not achieved. A failed crowdfunding campaign affects your market reputation and validation. It directly impacts your chances of securing funding from traditional investors.
3. Marketing costs for crowdfunding
Crowdfunding for startups needs a campaign to attract and retain the backers’ attention. Therefore, you’ll need to promote the crowdfunding opportunity. For promotion, you might need to opt for advertisement, social media, enticing offers for reward-based crowdfunding, and consistent PR efforts to attract more contributors. It can be a hefty sum, with no guarantee of any returns over them.
4. Getting scammed is easy
Any public platform has scammers, especially when it is related to finance and startups. So, stay aware of scam startups, impersonators, scratchy investors, and more. While most of the best crowdfunding platforms offer access to verified users, you must be aware and think before making any decision.
We are 21BY72, helping investors and startups connect through our Global Startup Summit. You can learn about industry insights and strategies to grow your startups and create effective investment strategies. Stay tuned to our website for more insightful startup-related blogs!
Conclusion
If you love to keep your equity safe and validate your startups while raising funds, crowdfunding for startups can significantly help. However, the cost of crowdfunding, the volatile nature of crowdfunding investment, and the tricky procedure have become a challenge for entrepreneurs and investors. Therefore, you must consider all the pros and cons of crowdfunding for startup fundraising before deciding on your fundraising strategy.
FAQs
1. What are the benefits of crowdfunding for startups?
Crowdfunding for startups has many benefits, such as access to funding without losing equity ownership, market validation, understanding market needs, and securing upfront costs for any project. Through successful crowdfunding, you can connect with your audience and build a market reputation.
2. What are the types of crowdfunding for startup fundraising?
There are four types of crowdfunding for startups: donation funding, debut (lending) funding, reward-based funding, and equity funding. Donation funding is funding without any expectation of returns. In debt crowdfunding, the startup must return the amount to the backers. In reward-based crowdfunding, the backer expects a return, like a gift of advanced service. Some crowdfunding strategies include giving away some equity for funds.
3. What is a crowdfunding platform, and how can it help in crowdfunding for startups?
Crowdfunding platforms give you a digital platform to connect with your target backers and raise funds. The best crowdfunding platforms have a pool of verified contributors eager to make crowdfunding investments and startups raising funds. They help both parties communicate and build a reliable relationship. They offer the infrastructure for startups to create campaigns, showcase their business ideas, and collect contributions. Platforms often provide additional services like payment processing, marketing tools, and analytics to help startups manage their campaigns efficiently.
