“To get people invest in an idea, they need to believe it as a good idea!”
Crowdfunding is a boon if used in the best possible way. Each has a different best and needs to figure that out in a different manner. Although there can be some essentials to know how to locate that best. Crowdfunding mainly involves three main bodies: The Initiator, The Platform, The Crowd.
Let us explore how the initiator uses the platform to reach the crowd.
Initiator decides the PLAN:
No doubt that the aspirants (the one aspiring to raise funds for his/her business) already know what product or service they wish to start a business about, but a plan makes it more compelling. All the crowdfunding sites have a thumb rule that the aspirant must have a project (product/service) which makes it viable and beneficial for the users and society.
- Viable project: The idea is to present a project as a final version of what one would finally offer rather than presenting raw form as plans, mere go about and stories which make the objectivity and success of the project questionable.
- Beneficial project: The value of the project must be promising enough to ensure that the product/service is going to benefit people by providing solutions and better alternatives in future. This rule indicates that any commercial artifact that entails harming components or risk for humans and society should strictly abstain. It is essential to keep people’s interests and wellbeing into knowledge to be funded by them.
Initiator decides the ‘How Much’:
The ‘How Much’ signifies the limit. Here is the question – How Much is for:
- Funds: After a plan is ready, an aspirant could estimate the amount of funds that may be needed to start a business. This estimation must be precisely done to ensure that all the expenses of starting a business are covered. Such expenses may include: Idea development cost; Market research cost; Processing cost; Administrative cost; Crowdfunding Platform fees; Taxes (since the money raised by crowdfunding is subject to taxable income).
- Time: One needs to set a timeframe to raise the target amount. Few crowdfunding websites restrict the maximum time limit (60 days on some platforms) to make sure that the project does not stretch too far. A reason to explain this is that these platforms believe that project success rates are reduced if the timeframe is longer. The crowdfunding platforms even suggest keeping the timeframe less than 30 days. This policy may retain the aspirant involved and enthusiastic to attract maximum backers for the project.
What happens if the target amount is not raised in the set time frame?
Well, that can be better answered if the type of crowdfunding one chooses is known. In case of:
- Fixed crowdfunding: ‘All or Nothing’ policy. If a project manages to raise the target funds in the mentioned timeframe, the aspirant gets all the raised money deducting the platform fees (usually 3-5% of the raised amount). On the other hand, if the target is not achieved, the aspirant does not receive anything of the raised amount. In this case, there is usually no platform fees since the backers are not charged.
Example: Kickstarter, Squareknot.
- Flexible crowdfunding: The aspirants always get the amount raised in these cases irrespective if they achieved the target by the set time limit or not. The aspirant, in this case, needs to pay 6-9% of the raised amount in addition (or not) to the platform fees.
Example: Fundly, ROCKETHUB.
- Fixed and Flexible Crowdfunding: There are also some platforms available which facilitate both of these crowdfunding types.
Example: Indiegogo, GoFundMe.
Reaching the Platform:
The crowdfunding sites have emerged immensely during the past ten years. Many crowdfunding sites are offering various packages to the potential entrepreneurs (initiator) and even the existing ones. Thus, it makes essential for an initiator to know the classifying nature of varying crowdfunding sites and choose the platform that best suits their business objectives. For instance, the following factors should be examined to help the initiator find the proper crowdfunding platform for their business:
- Know the type of funding one needs and the respective platforms:
- Debt-Based crowdfunding: When people lend money to an aspirant up with an intention to receive back the invested (lent) amount along with interest is known as Debt-based crowdfunding, e.g. Kickstarter, Crowdo, FundHere.
- Equity-based crowdfunding: Investment by people after analyzing the start-ups, assessing the scope of its success and finally buying the shares of business through initial investment to meet greater returns in future, e.g. Kickstarter, FUNDNEL, SEEDERS, AngelList.
- Reward-based crowdfunding: People invest small amounts in the start-up idea and get reward or perks in return. These may be the discount on the product/service which the start-up is about to launch or priority given to the customer (investor) in any form, e.g. Kickstarter, Indigogo, Ulule.
- Donation-based crowdfunding: People support good ideas! When people come across a project which they believe could do good and be fruitful in future they support the idea with money and become backers. The contributors (backers) express this belief in the form of donations and do not expect anything in return but get entitled to first access priority as a customer, e.g. Kickstarter, Patreon, YOUCARING, Friendfund.
- Know the nature and stage of business and respective platforms:
- Start-ups, e.g., Kickstarter, WeFunder, SeedInvest, Quircky;
- Existing businesses, e.g., Kickstarter, Dun&Breadstreet;
- Nonprofit organizations, e.g., Kickstarter, Startsomegood, Ketto;
- Research-based business, e.g., Kickstarter, Experiment.com, USEED, etc.
Communicating through the PLATFORM:
Images bring color to Ideas! Communicating the idea is essential in crowdfunding because it will help people decide if they want to back up the plan with money. A video presenting WHAT and HOW is a must. It would help people to know the viability of one’s project. The aspirant needs to communicate the reason for which people should be investing in his or her idea and the promising and unique value which focuses on backer’s and user’s benefits. In other words, the pitch should be loud and clear.
Initiator from the Platform to the CROWD:
Having a great deal of work may go in vain if the correct segment through the right sources is not targeted. As mentioned earlier, the time limit for a campaign is not long enough to reach people steadily. Project awareness needs pace to reach the potential backers. People who eventually turn into backers are:
- friends and family of the initiators, who have faith in them and their idea;
- a target segment which has particular interests in the field which the proposed project deals in;
- individuals or teams who do not have specific interests in the given area but the aspirant’s campaign makes them believe that the project is going to be a success.
Consequently, the idea is to reach and keep reaching to all three set of potential contributors until the due time of funding. Some may need to be personally approached, while some may require social platform promotions or others may be attracted with the viral marketing.
After the campaign is up on the crowdfunding platform and time for raising funds has begun, it depends on how one chooses to attract, educate and convince potential contributors to fund the business because no one understands any person’s idea and passion to make it a business as good as the initiator does.
This blog post was cowritten by Stavros Sindakis and Nipun Dhaulta