Crowdfunding for startups may have advantages over getting traditional funding for your new business. This page reviews the advantages and disadvantages of crowdfunding for your startup. Of course, we can also help with our free services.
Advantages of Crowdfunding for Startups
There are many advantages of crowdfunding for startups. The most obvious is that it opens the door to types and sometimes even amounts of funding that would otherwise not be available. Sometimes a business is too new to qualify for much of a credit line from a bank, or maybe not enough equity has been built up for a traditional loan. The other significant advantage of crowdfunding for startups is that you might develop a lasting and perhaps more profound relationship with your investors, which can persist through different product or service launches or expansions. More minor benefits include the ability to access money more quickly, the potential to have a built-in test group to run things by, and the additional PR you can gain when your investors spread the word about your product or service.
Crowdfunding for Startups: The Math
Of course, there is also the math involved with crowdfunding for business start-ups. Unlike traditional loans, you may get more favorable payback options with this choice, or at least some creativity in how and when you need to pay things back. You may be able to borrow a little at a time, just like having a credit line, but with more favorable terms than with a credit line. In addition, you may be able to more quickly and easily flex that credit line if you are successful or a new change or addition looks promising.
Disadvantages of Crowdfunding for Startups
The main disadvantage of this type of business funding is how hard it is to get in the first place. You will compete against many other businesses with new products and services they hope to get funded. As opposed to a bank that will consider all requests before making a decision and could potentially fund a high number, your crowdfunding for startups quest will compete with many companies. The other disadvantage is that the money may come with many strings attached – different reporting than you’d need to do with a bank and the need to follow up with certain perks. You may have to put more work into this type of funding overall.
Keep in mind that any time your funding includes giving up any equity, the disadvantages enter another territory, with the possibility that you will give up far too much of a valuable product or entire company a distinct possibility. We cover equity crowdfunding elsewhere.
This recent article describes the importance of crowdfunding for startups, and this article from Entrepreneur discusses crowdfunding for business startup investing.
Steps to Crowdfunding for Startups
Here are the general steps you must take if you apply for crowdfunding for start-ups. Some of these are quite general because the detail will come in the interaction between your chosen website and your need:
Organize yourself for Crowdfunding for Startups
- Know exactly what the funds will do for your small business. Explain clearly what crowdfunding for business start-up investment would allow you to do specifically. This will help you arrive at the correct amount of your crowdfunding and will clarify in your mind precisely what you need. Of course, it will also motivate you to pursue your funding assertively! You need to come away with a solid, clear, compelling elevator pitch. Try it out on friends and colleagues, and refine it to the point that it is perfect and concise. Keep in mind that potential investors are looking at websites with many possibilities. You only have a few virtual seconds to make your pitch.
Find the most appropriate crowdfunding for startups’ websites.
- Look for a startup crowdfunding website that has been around for a while, seems to fund projects like yours, and has a track record of finding funders at the level you need. When you’ve arrived at just a few, compare them to a bank loan – interest rates and terms. Look for projects like yours and see whether they have been noticed and funded, but be careful if the competition is so strong that your project will get lost in a bunch of like projects. This may be the most crucial step in your path to getting crowdfunding.
Carefully fill out all material you are asked for about your project or service.
- Make it incredibly compelling but also detailed as to why you need crowdfunding. In other words, it appeals to both the right brains of the investors and funders who want to know how great you could be and the left brains who want to know exactly where the money will get you there. After your clear and concise elevator pitch reels them in, you need to ensure you provide potential investors in crowdfunding for business start-ups enough information to decide whether your project is an excellent fit for them and has been well thought-out and conceptualized by you.
Use multimedia in your crowdfunding pitch.
- This is a great way to show off your product, service, or even yourself, and show potential investors that you are technologically capable and motivated to go beyond the written word. Spend time with compelling pictures and videos. Not only does this help give an in-depth view of your project or service, and it shows how innovative and motivated you are to spend time promoting it. Those looking to invest in crowdfunding for business start-ups will be impressed by a multimedia presentation and may be tempted to share it with others.
Keep in touch
- Sometimes potential investors in crowdfunding for business start-ups do not decide on their first or second pass through a website. Instead, they will bookmark specific promising projects to return to. They will look to see if new information is posted and how the initial steps are going. Of course, you may need their funding before you do too much. Still, suppose you can try out your project or service on a small test group, do market research, refine your marketing plan, or generally update your goals. In that case, this can help the investors better understand your product or service and show that if they invest in you, you are motivated to work hard on the project.
When You Are Up and Running
As the crowd assesses your potential project, you will likely be asked for additional information. Make sure you are thoughtful, diligent, and fast in getting the information to the prospective crowdfunding for business startup investors – not only do you want to make sure they do not lose interest but also see how you will respond when day-to-day challenges require you to do something. Try to understand from their request what their concern might be and proactively answer the direct question and any underlying concerns.
When you receive your crowdfunding, it will not be without strings. The crowd will want updates and information about how things are going. They may not release all the money immediately, so you must prove your project is viable and on track. Put as much effort into follow-ups with the crowd as you did when you initially got the money so they stay interested and motivated, whether merely to give you the rest of the loan or if you need to return for more funding.
One of the over-arching goals of the crowdfunding for startups process that many small business owners overlook is that you want to end up with investors who remain interested and engaged so that you might go back to them as your business grows and expands. Keep that in mind, and you will find success even beyond what you initially thought.
If at First…
One of the most complex decisions you must make when applying for crowdfunding is what to do if your project is not funded despite you taking all the above steps. Of course, you still consider your project meaningful and compelling, but the crowd is not (literally) buying in for some reason. There are three options at this point:
- Change something about your pitch. In other words, add a perk to the investors or even go as far as to raise the rate you are willing to pay or the amount of equity you will give up. Add other products into the mix of what the investors will get if they buy a certain amount of equity in your crowdfunding for business start-up pitch. All these options and more fall under the category of significantly changing your pitch regarding the actual benefits to the investors.
- Change your crowdfunding platform if you think a different website might attract investors. This step will only work if there is an excellent reason to do this – did you notice that another crowdfunding website seems to present pitches differently or attract precisely the kind of investor you are looking for? Does the new crowdfunding website give you a better chance of attracting the investment you seek? If so, then changing crowdfunding platforms may be worth it.
- Change the crowdfunding you are pursuing. Of course, this is the most radical step and might involve changing from a peer-to-peer loan to an equity crowdfunding pitch. Or maybe you thought you could give insider perks, but now you need to provide a little equity or payback.
Crowdfunding for Startups Summary
For an investor, crowdfunding for a business startup is quite exciting. They can hope to choose the idea or company with the most potential, and therefore there is the perception that they can make a lot of money this way. This approach by the investors puts more pressure on you to ensure they see the potential in your product or service, but you cannot make the mistake of over-promising. Remember that this is a long process, and you could lose your funding if you cannot meet the goals you have set over time.
The key to crowdfunding for startups is the balance between keeping the investors excited about your product or service without overdoing it. Also, remember that ideally, the crowd becomes interested in continuing to fund new ventures after your company is no longer considered a startup, so you need to keep them engaged and interested even after your product or service has rolled out. If your funding is of the equity type (rather than just a flat amount with a fixed payback), you will be related to these investors for a long time.
Remember, we can help! Our services are mostly free and all guaranteed. Contact us if you’d like to talk about your fit with crowdfunding for startups.
