Crowdfunding Facts or Fads


8 July 2016

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CROWDFUNDING MYTHS DEBUNKED

 

Crowdfunding may have taken a few years to become established but it’s an increasingly popular source of raising finance for businesses, and its use in Scotland has grown measurably in the past three years – see our post on the Scottish Crowdfunding Report 2016 for more info.

However, as this is still a relatively new source of funding there are some common misconceptions out there that we felt needed addressing!

 

#1. IF YOU POST IT, THEY WILL COME.

False!

This is where most campaigns fail because getting your pitch onto a platform is not enough and not by a long way. For the crowdfund to succeed you will need a well thought out marketing plan to drive page views. Set up a roadmap for how you will launch, build momentum and leverage your social network. Pre-promote it and then, once live, be prepared to be guest blogging and reaching out to media outlets to get critical coverage. For 90 days (say 30 pre-launch and 60 days for the campaign to run) your job will be a full time marketer of the campaign so factor this in to your normal every day workload. You cannot rely on the portal to promote your campaign – it’s all on you!

 

#2. CROWD IS UNSOPHISTICATED.

False!

Let’s take a look at the types of audiences on crowdfunding platforms:

Firstly, you have actual investors, namely Business Angels who will get hands on with a business after they pledge their equity. This group will be contributing skills and expertise as well as cash, and are likely to invest higher amounts in fewer companies. The collective pooling of expertise and knowledge from the crowd’s diverse experiences and capital are equally important in contributing to the long term success of the business.

Then you have the casual investor. Those who will invest equity but won’t be time invested in the business. These investors are more likely to invest lower amounts in more companies to spread their risk. This audience is high net worth professional so they will make informed decisions over who they chose to invest in.

Last, but certainly not least, are the enthusiasts, those supporting a product they are passionate about. This group seek product or reward investments and could be categorized as the innovators and adopters when thinking of the sales life cycle.

Innovators are willing to pay higher prices than any other customers to be ‘the first to own’ something. They tend to have financial liquidity, highest social status and closest relationship with innovators and knowledge of scientific sources. They are likely to give pivotal insight for development and production of a product.

Early adopters are more careful in choosing what to invest in than innovators to maintain their position as opinion leaders. These ‘trendsetters’ play a central role in establishing value of something and communicating it to their community.

The power of this crowd should not be underestimated, often becoming a company’s best marketing tool by organically creating a community around the product. Crowdfunding also offers great insight into the consumer demand for a product and what a market is prepared to pay for it.

 

#3. CROWDFUNDING MEANS YOU DON’T HAVE TO SPEND TIME PITCHING TO DOZENS OF INVESTORS

Yes and No.

While crowdfunding means you won’t be wearing through the leather visiting lots of investors you’ll still need to pitch to crowdfunding platforms to be accepted onto their portal and this may still require several pitches.

 

#4. IT’S A CHEAP ROUTE TO FINANCE.

Well this all depends.

Most platforms charge based on a % of the amount raised which can range from a 2% to over 13%. If you go for an equity deal there will often be an additional set legal fee so do your homework to see the true cost of what you will actually raise. If you are offering product based rewards remember to factor in the cost of delivering these which is sometimes overlooked.

Secondly, some sites will only let you keep the money if you reach your funding goal, others will let you keep it even if you don’t, but may charge a higher fee to let you take this option. Overall though, the true cost to consider is that raised in point 2. Crowdfunding is not easy – to succeed you have to invest a lot of time in the campaign so don’t ignore this cost when doing your sums.

 

Crowdfunding is hard work, but if businesses and investors attain the confidence to get involved in this still relatively new format, there are benefits to be enjoyed. Not only do you raise cold hard cash but all of that marketing effort has also gained you an engaged customer base, raised the profile of your brand or product and created a strong social media following – all of which makes you a stronger prospect for future investments through the more typical channels – and crucially allow you to place a stronger valuation on your business.

More Coming this week on the iV Crowdunding series:

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By Silvia Gatti, Informatics Ventures

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