By Gabriel Onyango
In an age where funding business ideas from traditional sources such as banks, is getting harder by the day, crowdfunding provides a unique opportunity, where creativity, innovation and ability to connect with people count more than a well-crafted business plan.
The backers or financiers of crowdfunding campaigns come from all corners of the world, supporting ideas they feel a connection to. Crowdfunding platforms make money by taking a commission out of the money you raise. They include M-Changa, GoFundMe, Kickstarter , and Indiegogo.
Currently, all the above platforms charge a handling fee of 5 per cent but the difference lies in the individual extra processing charges; dependent on one’s location and means of payment.
Advantages of using crowdfunding
A successful crowdfunding campaign is an indication that your product or idea is compelling enough to move people to contribute towards it.
In traditional funding, with the help of a fancy business plan, you can start a business that has no indication of the customer’s view of the product. Crowd-funders on the other hand even manage to get pre-orders while their ideas are still in the idea phase.
The feedback you get from backers whether negative or positive can be used improve the product before launching.
Some of the people backing you represent a good portion of your future customers. They often feel like a part of your mission and are eager to help you out by pointing out areas for improvement and features they do not like.
A good example of this is the Coolest Cooler – a cooler box that can blend drinks, play music, charge a phone, comes with knives, plates and LED lamps.
Ryan Grepper – the entrepreneur behind it, after failing in his first attempt to raise money, broke the record for the most Kickstarter funded campaign ever in his second try at crowdfunding. He learnt from his mistakes, changed a few things and made history.
Most often, people do not view crowd-funded ideas as businesses. As a result, they easily spread the word to their friends, sharing your message on their social media pages. This, in turn, builds momentum by word of mouth that is organic for the business. Large corporations often need to spend tons of resources, creativity and time to achieve this kind of push – sometimes to no little avail.
Few things bolster the confidence of investors much like an idea or a product with proven interest from thousands or millions of people. It differentiates you in a pitch when you can show that you already have thousands of pre-orders or commitment from customers even before launching the product.
Types of crowdfunding campaigns
The type of campaign one chooses to run, depends on the nature of the product or service-is it artistic, a social enterprise, technology-based etc. The stage your business is at matters; certain types of campaigns only fit established businesses while others fit virgin ideas.
- Equity-based crowdfunding
In this type of campaign, you give a section of your company to funders. For example, you may decide to set aside 12 per cent of your business in order to raise sh1.2 million. That means that one percent of your company is worth 100,000.
Once you set a rate, people can invest as much or as little as they feel comfortable.
This type of campaign is a good fit for established businesses, with a record of accomplishment and a company valuation. Alternatively, also useful for campaigns that can’t offer rewards to funders.
- Reward Based Campaigns
Here people pledge money in return for rewards. The rewards can vary; a promise to deliver the first issue of a new product, special discount, a factory visit, limited edition product designs etc.
The people investing in these type of campaigns are mostly future customers and friends of friends. So be careful about what you promise them. If you miscalculate the costs and fail to deliver the promised rewards, you can create a bad rapport.
- Donation Based Campaigns
This is suitable for non-profit campaigns, social enterprises, charities and individual causes such as hospital bill drives. The funder gets no financial reward from the transaction apart from a sense of fulfillment from supporting a cause they believe in.
- Debt Based Campaigns
These types of crowdfunding campaigns are comparable to loans. The funding platforms have to evaluate all businesses for creditworthiness before approving their campaigns. The funders earn interest on their investments and can suffer losses as well, depending on how the business performs.
This form of funding is best suited for established business with a ready proof of concept and a healthy financial record.
Overall, crowdfunding provides a creative avenue to raise funding for those ideas or businesses you’ve always wanted to launch for the longest time. In addition, get to know whether your idea addresses a real problem or it’s just a figment of your imagination.