What Is Crowdfunding and Why Do Small Companies Embrace It

Only recently, entrepreneurs with brilliant ideas or plans for startup ventures turned to banks and other financial institutions for capital. That has changed. It happened especially with the reduced loan amounts that small business owners get nowadays. So it may be a good time to answer the question: what is crowdfunding?

Crowdfunding has become one of the attractive alternatives for SME owners. This is regardless of whether they are looking for capital for new businesses or money to inject into existing ones.

what is crowdfunding

What Is Crowdfunding?

Crowdfunding or crowdsourcing is a form of raising money. This is usually done by rallying like-minded persons to invest in a project. An individual with a bright idea proposes it to friends, colleagues, and family. The purpose is to generate the proper support, not just financially but professionally as well. Crowdfunding may not have been a novel concept. But it is only about five years ago that it really took shape. The internet has made crowdsourcing less complicated. It also turned into a viable solution for many entrepreneurs.

Over the last several years, crowdsourcing platforms have raised millions of dollars for different types of projects. It works when individuals pledge money for your idea. Sometimes it is in exchange for some sort of reward, depending on the kind of crowdfunding campaign you are using.

  • A crowdfunding project can be in a donation form. In this case, people give money because they believe in the idea.
  • There also is debt crowdfunding, where an entrepreneur has to pay back the financing with interest.
  • Lastly, equity consists of giving shares of the company to the people who contribute.

Who Uses Crowdfunding?

Another part of the what is crowdfunding question is who it benefits. Which companies can be said to make the most of crowdsourcing? The flexibility of crowdfunding allows just about everyone with an idea to capitalize on this money-raising avenue. App developers are some of the common names that come up on crowdsourcing sites. This happens as they look for help putting their products on the market.

Film producers also use these websites to drum up financial and professional support for projects the way Veronica Mars- the movie garnered help from fans. Musicians like the Rock band Marillion have been known to raise money to produce albums. A good number of the concepts on crowdsourcing platforms are creative projects. But businesses have grown to embrace the strategy as well. There are entrepreneurs who can’t receive capital through conventional means. This is especially because of the strict regulations in place are usually the ones who turn to crowdfunding.

Why Small Businesses Use it?

As an entrepreneur, you may wonder, what is crowdfunding offering me as business finance option? Think of this in comparison with what traditional methods may not. In most cases, the suitability of crowdsourcing funds depends on the business idea and the audience that you pitch it to. But understanding this financing concept is vital.

Going on an online platform and putting your idea out there for people to invest in has some advantage that small enterprises have come to appreciate with time. Wondering what is crowdfunding’s difference when compared to other money-raising techniques?

4 Tips to Make The Most out of Crowdfunding

1. Attract a Large Pool of Investors by Widening Your Audience

Crowdsourcing involves a very wide audience. This is unlike asking money from a bank or getting capital from angel investors. You can choose this instead of limiting your funding options to only a select number of wealthy individuals. Crowdfunding allows you to tap into a large group of people. Typically, they are willing to see an idea like yours flourish. Generally, you are casting a wide net and seeing who ends up in it.

With a small pool of investment options, you can’t afford any missteps. A singular one means losing your few opportunities. Crowdfunding offers different alternatives, especially when your business concept is an excellent one. Even when you don’t have great personal networks, there is still a chance to raise the needed funds.

2. Discover Advanced Marketing for Free

Crowdsourcing platforms such as Indiegogo, Fundable, and Kickstarter receive a lot of visitors. They are mostly investors in search of lucrative opportunities to corporations looking for fresh ideas. You have the chance to present a small business proposal or expansion project on a crowdfunding website. Therefore, many people are bound to see it.

Getting the right eyeballs on an upcoming concept without paying a cent does wonders for your brand and morale. SMEs sometimes have to spend thousands of dollars on marketing campaigns just to get a brand adequate visibility. As people follow your fundraising from start to finish, they become part of the brand’s growth. Individuals also share crowdfunding projects on other sites like Twitter and Facebook, meaning even more people get to see it.

3. Focus on Networks More than Just on Money

Another answer to the question of what is crowdfunding’s benefit to a business is the support gained from such campaigns. Crowdsourcing provides more than just financial aid for SME owners. These platforms have professionals from all sectors. Some of them are more than eager to assist novice entrepreneurs.

With the help of some experts, you can turn a decent small business project into a splendid one. You can do this through experienced industry advice. Getting it may not be possible when working with a financial institution. There is the moral support that some people, including family and friends give on crowding websites. This support which goes a long way, particularly when just starting out.

4. Be Prepared for Market Validation

Investors on crowdfunding websites dissect a presentation before putting money into a campaign. If your idea does not make the cut, then it means it is not good enough. The upside of this is that individuals may scramble to invest in your small business. Then, something is going right.

Your brand has to sell itself for a crowdsourcing campaign to bear any fruit. When it does, you establish a certain credibility on the market. This one is always hard to earn, especially for startups. The more validation a concept gets on a crowdfunding site, the more likely for other people to buy in.

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Stepping into the Crowd

Crowdfunding can get your small business the capital injection it needs without going through the obstacles that accompany traditional financing solutions. However, entrepreneurs must answer the question; what is crowdfunding? How to approach it for the best possible results?

Crowdsourcing allows small business owners to raise money in a streamlined fashion. So you save money because you don’t have to pursue each investor separately with all your documents to showcase your idea.

Images from depositphotos.com.

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