Crowdfunding might be a feasible alternative for raising finance compared to traditional funding options and even a more streamlining option in contrast to all the hassle and stringent criteria of reaching out to angel investors and venture capitalists.
Nevertheless, crowdfunding campaign models pose a lot of inherent risks. Contrary to what many entrepreneurs think, it’s not easy money. In fact, only one out of five ventures profit from a successful crowdfunding campaign. As you can imagine, setting a successful crowdfunding campaign is not a forte most business owners excel in.
So how can you determine if crowdfunding is the suitable financial model for your startup or project? If you are in light of crowdfunding as the primary source of capital for your upcoming initiative, here are some of the most critical questions you must keep in check.
Questions to Answer Before Crowdfunding Your Project
1. Is Crowdfunding The Perfect Choice For Your Project?
First and foremost, have you considered other funding methods and concluded that crowdfunding is the ideal option for you? As mentioned, crowdfunding may not be the best choice for every startup. For instance, typically, crowdfunding campaigns must be alluring to the masses. To begin with, if your product/service isn’t appealing to the public, it might be challenging to pool any investments.
You may wish to scrutinize the pros and cons before engaging in a crowdfunding campaign.
2. Which Crowdfunding Platforms Will You Use
There is a myriad of crowdfunding platforms available. However, some are only favourable to specific industries or types of projects. Choosing the right platform can be an overwhelming process. Most importantly, your prospective platform should align with your financial goals. Therefore, you have to consider their type of funding model.
Some platforms, such as Kickstarter, use the all-or-nothing model whereby you can get hold of the pledged amount if you reach your target funding. On the other hand, other platforms such as Indiegogo advocate for both all-or-nothing and flexible, or keep-it-all models.
Also, another top consideration is the platform’s fee structure. For example, do they rely on credit processing fees or percentage platform fees? Also, an ideal platform should offer several customization options to improve your design, brand and, in general, advance your campaign.
Finally, scrutinize any restrictions before settling for any platform. Again, it’s best to familiarize yourself with the rules and guidelines of your potential platform to ascertain your project fits their requirements.
3. How Much Money Do You Intend To Raise
It might be injudicious to pluck a random figure without considering exactly how much money you intend to raise. Bear in mind that a high-end target might be challenging to achieve, whereas the whole process could be time-consuming and useless for a low target.
Not to forget, most platforms terminate the project, and your backers receive all their donated money back if you haven’t met your funding goal by the end of your campaign ( all-or-nothing model ). So it’s wise to set a realistic figure after considering all the costs associated with crowdfunding.
It’s worth mentioning that if you need a large amount of cash, crowdfunding may not be a practical option. For example, Kickstarter, a prevalent crowdfunding platform, raised over 10,000$ for only 30% of the projects and 100,000$ for only 15% of the projects.
4. Which Form of Crowdfunding Befits Your Project
This should be your most imperative concern before crowdfunding your startup or project. More to that, it’s vital to consult an expert regarding this as your decision could affect your organization in years to come.
As a starting point, you should understand the prevalent forms of crowdfunding, peer-to-peer lending, equity and reward-based crowdfunding and choose the best for you. If it’s equity crowdfunding, you have to be willing to give up a portion of your company.
As the name gives it away for reward-based crowdfunding, you have to offer attractive rewards such as exclusive shopping experiences and discounts in honour of their contributions. Akin to traditional borrowing, peer-to-peer lending allows investors to provide a loan with the expectation of getting paid back with principal interest.
5. Can You Fulfill The Assurances You Make?
Typically, failure to deliver awards and finalizing projects in the allotted time frame is a significant difficulty overshadowing the success of crowdfunding campaigns. Consequently, it’s vital to set realistic promises you are capable of keeping and will not have a substantial impact on the funds you raise. You don’t want to be overwhelmed by the rewards you have assured to deliver.
6. What’s Next After The Crowdfunding Campaign is Over?
You should have a concise vision of how to capitalize the funds you have raised, especially for equity crowdfunding, where your investors might demand positive traction to grow and develop your business.
Additionally, you should be willing and ready to incorporate the relevant feedback or new ideas you have garnered through the campaign to better your product/services.
7. Is It The Right Moment to Crowdfund Your Startup?
Needless to say, the best time to crowdfund your startup or project is when you need the capital to propel your venture to the next big stage. However, to fully utilize the benefits of crowdfunding, your startup/project has to be at the optimum stage of development. For example, it could be after building your customer base, when you are looking for means to fund your first production batch or when you want to accomplish a goal for your business but you can’t afford it.
We know it can be exacting to gauge the perfect timing to start a crowdfunding campaign. Still, with the help of an expert with practical experience in crowdfunding business ventures, you can garner valuable insights that could help determine the optimal stage to launch the crowdfunding campaign. Alternatively, if you have doubts on whether it’s the right moment, probably it’s not.