Aside from traditional financial sources provided by banks, business angels or venture capital firms, crowdfunding has been established in recent years as a suitable alternative to acquire money in an online context.
Crowdfunding is an online open call aiming to the provision of financial resources, either in the form of donation or in exchange of the future product or other forms of monetary or non-monetary rewards over a fixed time limit.
Crowdfunding has become a popular tool for small business or solo-entrepreneurs who rely on a wider online public to invest in the new product/initiative in exchange of some form of compensation, or just because people believe in the project.
The main aims of this Bite Size are:
- Understand what crowdfunding is as an alternative for funding your initiative
- Learn more on the different types of crowdfunding campaigns
- Learn how to plan a crowdfunding campaign for you initiative
How does crowdfunding work?
Crowdfunding is a form of fundraising where a business asks the public for a contribution, usually in exchange for equity in the company. Crowdfunding usually entails a private company asking large numbers of people for small contributions. This differs from the more conventional practice of raising money through angel investors or venture capitalists, where a handful of actors inject larger sums into your business.
In return for investing in your business, supporters will receive equity, albeit with less liquidity than what they would get with public stocks.
Crowdfunding platforms are websites that enable interaction between fundraisers and the crowd. Financial pledges can be made and collected through the crowdfunding platform.
Fundraisers are usually charged a fee by crowdfunding platforms if the fundraising campaign has been successful. In return, crowdfunding platforms are expected to provide a secure and easy to use service.
Many platforms operate an all-or-nothing funding model. This means that if you reach your target, you get the money and if you don’t, everybody gets their money back – no hard feelings and no financial loss.
There are several crowdfunding types which are explained below. This guide provides unbiased advice to help you understand the three most common types of crowdfunding used by profit-making SMEs and startups, which are: peer-to-peer, equity, and rewards crowdfunding.
Main types of crowdfunding
- Peer-to-peer lending: The crowd lends money to a business with the understanding that the money will be repaid with interest. It is very similar to traditional borrowing from a bank, except that you borrow from lots of small investors.
- Equity crowdfunding: Sale of a stake in a business to several investors in return for investment. The idea is like how common stock is bought or sold on a stock exchange, or to a venture capital.
- Rewards-based crowdfunding: Individuals donate to a project or business with expectations of receiving in return a non-financial reward, such as goods or services, at a later stage in exchange of their contribution.
- Donation-based crowdfunding: Individuals donate small amounts to meet the larger funding aim of a specific charitable project while receiving no financial or material return.
- Profit-sharing / revenue-sharing: Businesses can share future profits or revenues with the crowd in return for funding now.
- Debt-securities crowdfunding: Individuals invest in a debt security issued by the company, such as a bond.
- Hybrid models: Offer businesses the opportunity to combine elements of more than one crowdfunding type.
Crowdfunding connects to the Blue Economy
Renewing and promoting the blue economy is a great challenge, but also an excellent opportunity.
For instance, we are all becoming more conscious of climate change and the importance of preserving our oceans. Thus, blue resources are gaining more attention as the sectors of the blue economy are vital components of the regional economy and provide significant innovation and wealth potential.
All these steps towards greater sustainability mean that our society is at the beginning of a new era where crowdfunding can play a key role in financing SMEs seeking to develop business initiatives.
Therefore, especially with regards to the blue economy, crowdfunding can bridge the financial gap between innovative ideas and their implementation. But also, also in sectors such as tourism, hospitality, sports or energy, crowdfunding initiatives are growing bigger to support new projects.
Through crowdfunding, initiatives in the blue economy sector can access funding for their campaigns. Furthermore, crowdfunding can help to test and develop innovative blue economy products and services.
But, how to? Find out!
- Go Local
Research indicates that project initiators attract mainly local donors. Family and friends also play an important role as an early source for funding. Donors in general prefer projects geographically close to their home. Locals are therefore an important group of potential donors in tourism crowdfunding projects.
On that note, crowdfunding is a great example of how to mobilise your own ecosystem to gather financial resources for your initiative. You can learn more on how and why to reach out and collaborate with others within our “Your Ecosystem” area of knowledge.
- Attract other Blue economy participants
Likewise, other blue economy participants may have a great interest in new and improved blue economy services that attract attention to the offer.
Blue economy projects might also attract the recipients of blue economy services, interested in the improvement of the quality of services offered. Public authorities can also play a very important role by promoting the activities that are being developed in their regions and collaborating in the financing of these projects which generate sustainable and equitable economic growth for all.
At the end of the day, potentially the whole community will benefit from entrepreneurial resilience in the area, and for that collaboration is key.
- Differentiate your offer by implementing rewards
Rewards provide additional features and services related to the project, which allows a better matching to “customer preferences” of potential donors.
Project initiators can define rewards for specific price classes. Rewards are sent to a donor, if he or she provides a specific amount of donation. Rewards compensate donors for their pledge money and can be seen as an extrinsic incentive additional to the pure intrinsic motivation by helping to realise the project.
Consequently, diverse rewards provide additional motivation to various donors to give money for a project acting as product differentiation because additional features are added to a project for specific target groups. Different “price levels” of rewards allow to better match the willingness to pay of different segments of donors, hence implementing a higher number of different rewards allows a better segmentation supporting the success of crowdfunding campaigns.
- Promotion and media
Assign ownership of who will manage press interviews, marketing, customer support and so on. Running a successful crowdfunding campaign will take at least three to six months of planning, coordinating and execution. Honestly, it might be a full-time job on top of your full-time job. But on a more positive note, the more work and time you invest in it, especially in building your community as well as the tips above, the more likely you are to succeed.
Today, media has been strongly adapted to opportunities of online communication and has been switched to gradual differences between simple text and interactive multimedia applications. Video-based communication is generally most effective. Results from other crowdfunding campaigns show that projects with a video are more often funded successfully (Mollick 2014). That being said, images and video do enhance the quality of communication. Videos and animations are a staple of good crowdfunding campaigns, and they can provide huge amounts of information to your prospective investors in a short time. However, don’t be tempted to spend loads of time and money on your multimedia, as this can be self-defeating.
A website of the project will be easily accessible by those wishing to know more about the initiative and allows individual communication with the stakeholders. It can generate traffic to the crowdfunding platform and enhances communication with the stakeholders increasing trust and perceived proximity.
Also, social media platforms can positively influence the number of potential donors for a project, their purchase decision and their willingness to pay. The use of additional social media platforms helps project initiators to reach and establish further new or yet rather weak contacts. Correspondingly, e.g. the number of Facebook friends of project initiators are seen as a success factor of crowdfunding campaigns as a means of social capital to the project.
You can learn more on how to use digital social media and online presence for different purposes within our “Digital Marketing & Social Media” area of knowledge. However, be aware that online trends are ever-changing, you might need to adapt quickly!
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