Having a great idea for a business is
one thing. Getting the financial backing to grow, scale and make it a
success is quite another.
Most entrepreneurs approach funding in stages, starting by dipping
into their own savings, going cap-in-hand to friends and family, taking
advantage of government grants, crowdfunding and potentially seeking
angel and venture capital.
The best funding option depends on the business, its track record and
growth plans. Some companies stay self-funded forever, while others
need the capital injection and expertise from outsiders. Getting the
right investment, in the right sums at the right time can often make the
different between a startup’s success or failure.
Gendays has put together a list of common investment options for
startups, and pros and cons for each. It will cover the following:
- Bootstrapping
- Government grants
- Angel investing
- Crowdfunding
- Equity Crowdfunding
- Venture Capital
CROWDFUNDING
Crowdfunding is a way to raise small sums of money for your startup
from a large amount of people. The funding concept dates back centuries,
but modern-day crowdfunding is being fueled by the Internet and
proliferation of social media. Dozens of online crowdfunding platforms
have cropped up in response to a growing number of entrepreneurs looking
for alternative ways to fund their startups, and more investors seeking
alternative places to put their money.
There are two main types of crowdfunding: rewards-based and equity.
In this article we’re dealing strictly with reward-based crowdfunding,
which is when entrepreneurs presell a product or service without
providing equity or shares to investors. Well-known reward-based
crowdfunding platforms include
Kickstarter and
Indiegogo, to name just two.
Some examples of successful crowdfunding campaigns include
The Veronica Mars Movie Project, which raised more than $5.7 million (U.S.) in 2013, and
Corner Gas: The Movie, which raised a more modest $285,800. It was also a Kickstarter campaign that launched the
Vanhawks Valour smart bike. That story didn’t end well, however, with the company last reported to be on the
verge of shuttering.
Below are the pros and cons of rewards-based crowdfunding.
Pros
Low cost, low risk for founders: Let’s say you have a
great idea but you don’t have the money to find out if it will sell.
Crowdfunding allows you to test that theory by launching it on a
crowdfunding platform and investing a few marketing dollars to promote
it there and on social media.
If the money doesn’t come, at least you haven’t invested your life
savings (presumably) and can go back to focusing on your day job — or
your next big idea.
Immediate cash injection: If you’re idea gets enough financial backing, you can start building your product or service right away.
“Money is the fuel to not just start, but to grow,” says Craig Asano,
founder and executive director of the National Crowdfunding Association
of Canada. Of course, it’s best to have a budget first to figure out
how to spend the cash and increase your chances of being a success.
Instant network of buyers and investors: Through the
act of raising money through the crowd you’re automatically generating
consumer and investor interest, which hopefully translates into future
sales and investment.
“Crowdfunding improves access to cash, but also the crowd — a vast
network of potential investors, buyers and supporters who contribute
their resources to help realize a project,” says Asano. “It all plugs
into an ecosystem that is vying to help companies succeed.”
Cons
Pressure to deliver: Now that you’ve raised the
money, you need to deliver the product on time — and for your sake, on
budget. This is the most stressful part. Not only are you spending a lot
of other peoples’ money, but they’re tapping their fingers waiting to
see the results.
Your job is to deliver the product as promised, when promised, or start coming up with plausible excuses as to why you can’t.
Everyone else is doing it: There are a lot of great
ideas being pitched on crowdfunding platforms today. What makes yours
special? Why should someone pledge their money with you, and not the
other startup?
“It’s hard to stand out from the crowd,” says Asano. He says startups
need to find ways to better compete for crowdfunding dollars, and lure
people to their crowdfunding page.
Lots of work with potentially no payoff: We hear a
lot about the crowdfunding success stories, but not as much about the
failures. Many startups don’t raise enough money through crowdfunding,
and have to go back to the drawing board. It can be soul crushing.
“You could go through a lot of work and raise a goose egg,” says
Asano. “That kind of hurts. You have to take that in stride. Either you
need assistance with online marketing, or the product you though was the
bees knees of XYZ wasn’t.”
Takeaway
Rewards-based crowdfunding is a great way to raise money with no
string attached. However, it’s not as easy as launching a page and
watching the dollars roll in. Startups looking at crowdfunding need to
be strategic about how they market online, what they offer investors as
incentives, and how they’ll produce and deliver the product to generate
happy customers in the end.
After all, for many startups, crowdfunding is the first stage of a
larger growth plan. It’s important to try to get it right the first
time.
This actually the Karma’s third teaser video, 
