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crowdfunding an innovative financing tool
WHAT IS CROWDFUNDING?
It is the use of a small amount of money from a large number of contributors to finance a business venture. Using the advantages of numerous social media and websites dedicated to crowdfunding, the method utilises the easy accessibility of vast networks of people to bridge the gap between investors and potential entrepreneurs. While financing a bright startup plan has its own share of rejection phases, crowdfunding has evolved and surfaced as the most innovative financing tool.
HISTORY OF CROWDFUNDING
Although crowdfunding has a rich and illustrious history dating back to the 1700s, crowdfunding first came into existence in 1997 when a reunion tour of a British rock band was funded by fans through online donations. Inspired by the overwhelming response, a musician and a computer programmer, Brian Camelio, launched ArtistShare in 2003. Having started as a website where musicians could seek donations to produce digital recordings, it has evolved into a fundraising platform for projects related to film and photography along with music.
HOW DOES IT WORK?
The most common method of crowdfunding is using sites like Kickstarter and Indiegogo, where donations are sought in return for special awards. Special awards could include free product or even a chance to be involved in designing the product or service. In other crowdfunding websites, it is also possible to assemble loans and royalty financing. For example sites like Lendingclub allows members to directly invest in and borrow from each other with the notion that eradicating the middlemen i.e. banks, means both sides can win in the transactions. Royalty financing websites appear to be rarer with the idea of linking business owners with investors who lend the desired amount for a guaranteed percentage of the revenues for whatever the business is selling into the market.
In hindsight, most investors seek to invest in the next best thing. In 2015, nearly 80,000 backers put up more than $20 million on Kickstarter for a company wanting to develop a smart watch as an alternative to the Apple watch. Crowdfunding is a platform for anyone wishing to build on an idea. One of the more amusing projects which received a huge backing was from an individual who wanted to create a new potato salad recipe. While his fundraising goal was only $10, he raised more than $55,000 from 6,911 backers.
BENEFITS FOR INVESTORS
So what is there for the investors? Crowdfunding projects are mostly reward-based i.e. investors are likely asked to participate in the launch of a new product or receive a gift for their investment. For example, the producer of a new soap made out of bacon fat sent a free bar to each of its investors as a gratitude gift. Another popular crowdfunding investment is the designing of new video games who are rewarded with advance copies of the games.
ADVANTAGES OF CROWDFUNDING
Social Proof: When accessing popular crowdfunding platforms, an individual is exposing their messages to all kinds of audience. If done correctly, a crowdfunding campaign can result in solid validation and social proof that will trigger the growth story of your business. Social proof is used as a powerful psychological force that motivates the viewers to buy your product or service.
Earns Loyalty: Investors who back your idea are usually the ones who become early adopters and potential brand advocates since you have managed to earn and maintain people’s trust in your abilities to the extent that they are willing to place their money in your idea. It is the golden stage whereby the early adopters will keep the momentum high once your campaign winds up, by sharing your story with others.
Cost-effective: Crowdfunding your project does not always have to have a huge initial investment. The idea will also be featured in press releases, blog which may tend to be cheaper. It will bear a long-term awareness tag.
Start Pre-Selling: Since your idea has been backed by numerous investors over the internet, your product or service will enable a pre-sell from the earliest stage of the business. The early adopters will also have sold your concept or business idea even before it hits the market.
Refine the idea: Every new idea is a great idea but one can never be sure of the loopholes involved. The business idea having been placed in a website will generate feedback allowing you to engage the potential customers and receive valuable constructive comments and criticisms for refining the idea into a potential product or service for tomorrow.
FACTORS TO ENSURE A SUCCESSFUL CROWDFUNDING CAMPAIGN
Here are some elements described by the Entrepreneur to ensure a successful crowdfunding campaign:
Have at least a small network of enthusiastic friends and family willing to help get the ball rolling by giving and urging others to give.
If you’re giving out perks in return for money, make sure the perks are cool.
Present a serious business plan and an explanation of why the money will take your enterprise to the next level.
Demonstrate that you have your own skin in the game because of the personal funds you have already poured into the business.
Include a video pitch and keep it short and concise, with a call to action.
Be prepared to essentially live online, staying active on social media sites, until the crowdfunding campaign is complete.
In Nepal, the concept of crowdfunding is slowly catching up as one of the most innovative methods to raise capital to build your business idea. Since Nepal is a nation where investors are hard to come by, budding entrepreneurs can reap numerous benefits from placing their ideas over the internet and look for results. In return, crowdfunding has been proven a smart way for entrepreneurs to authenticate their business formula, win over early adopters and receive the kind of exposure they require to grow holistically.