As an online concept, crowdfunding hasn’t yet been popular for a decade. A relatively niche alternative to bank loans and VC investment, crowdfunding began to balloon in 2008 and has been a popular option for startups since 2012 thanks to some high profile campaigns. Despite its popularity, though, many are still unsure as to whether crowdfunding is right for their business, and even how the process actually works. Here are the key benefits of crowdfunding small businesses should consider when deciding how to fund their next project.
It can cost a lot of time and money putting together a product and bringing it to market. Most small companies will do so without any real guarantee that there is a customer base out there to keep the fruit of their labors alive. The beauty of crowdfunding is that it works both in raising capital and in gauging public interest in the product. If a product is wildly sought-after, the company will smash its funding target. If a product doesn’t have the interest, it won’t draw the necessary funds and the money is returned to the backers automatically.
One of the most attractive elements of crowdfunding a project is the freedom that comes from having multiple smaller investors rather than a handful of key stakeholders. Essentially, this means greater creative control over the direction in which the project is heading, provided communication with the multiple investors is consistent and comprehensive enough. It also means control over how a company rewards its backers, from early access discounts to limited editions or extras.
For musicians, for example, crowdfunding can free an album’s production from the demands and constraints of record labels. Rather than having to tailor their output to suit their label or their projected commercial output, an artist can make the music their fans want to hear. In many ways, this applies to product development for startups - crowdfunding gives the company total control over its creative vision. Sure, there will be a lot of people disappointed if the product doesn’t materialize in the form they expected, but so long as the dialogue is open, crowdfunding gives young companies unrivalled freedom of expression.
One helpful side effect of asking backers to part with cash before a product is even finalized is that they become an engaged part of the project. No product is perfect when prototyped, and having multiple financially invested sounding boards can only mean yours is more market-ready upon launch. Not only is official feedback potentially priceless for your product, crowdfunding is also a good way of testing how well package deals will perform in the future. For example, if you offer backers who pledge $50 or more a free t-shirt with their investment and this option proves overwhelmingly popular, you know that additional extras can help your product sell when it makes it to market.
Of course, crowdfunding has cons as well as pros. The average crowdfunding raise is around $5,000, and the work required to meet that target is far greater than many would initially realize. The crowdfunding platforms naturally take a cut of the raise, and some 60% of campaigns don’t meet their targets for one reason or another. On top of this, the pressure of having so many backers waiting for a product can hang heavy on some businesses, and crowdfunding is by no means a carefree route to easy capital. When deciding how to fund your next product or project, consider both the upsides and downsides to this relatively new, pleasingly democratic form of fundraising.