Crowdfunding is an increasingly popular alternative to traditional funding sources. It harnesses the power of social media to raise funds from online networks with shared interests.
In this article, Sheeza Ahmad Shah from UpEffect, a crowdfunding platform dedicated to social entrepreneurs, shares some insights and advice about crowdfunding with one of our course educators.
Jeremy: What is crowdfunding, and how is it different from traditional grant and investment funding?
Sheeza: Over the last decade, the progression of technology has equipped entrepreneurs with inexpensive tools to convert their ideas into successful businesses. Due to social media, companies have been able to build large, overnight tribes of customers and product champions.
Though an early-stage company should prioritize bootstrapping as its means of financial sustenance, for some, this is not always a viable option. Converting some ideas into businesses can be capital-intensive, particularly those dependent on expensive production and R&D.
A crucial step many entrepreneurs are skipping is the market validation stage. When you’re low on capital, you become more efficient with resources and utilize all tools at your disposal to make the business succeed. When you’re still figuring out the vision of the company, building the prototype and testing the market need, the last thing you need is external pressure and exertion of control. During the early stages of a company, utilizing resources efficiently is vital for survival and raising money from investors or applying for grants can become a huge distraction.
This is why entrepreneurs are exploring alternative finance models – in 2015 the crowdfunding market grew to £3.2 billion (NESTA). Crowdfunding brings together a group of passionate supporters to fund a project that they believe in bringing to life. Launching a rewards-based crowdfunding involves putting together a 30-day online campaign comprising a video pitch, high-quality product shots, details on traction, business model, team and press. The campaign is used to secure pre-orders and sales to assess the demand for the product. Running a campaign with a deadline means you have a chance to create urgency around your product and/or service to sell your idea to customers. If you meet your funding goal, you get to turn your idea into a business and if you’re unable to meet your target, you now have direct feedback from the market giving you the opportunity to refine and launch again.
Jeremy: What are the greatest advantages of using crowdfunding to fund a social enterprise?
Sheeza: £42 million was facilitated through rewards-based crowdfunding platforms in 2015, with a 62% year-on-year growth rate (£21m in 2014, £26m in 2014) according to the 2015 UK Alternative Finance Industry Report. This is because crowdfunding has proven to be immensely beneficial for startups:
Market validation: Getting feedback from customers is a key component to building a successful product and company. Crowdfunding is an inexpensive way of reaching thousands of potential customers and finding out what they think. Instead of putting an order through for manufacturing your product, hiring staff, building a website or investing in other expenses, you can create a campaign page and test how many people are interested in buying your product. You’re able to go directly to your customers and sell your idea.
Pre-orders/Sales: The success of a startup is measured by its traction. Without sales or month-on-month growth, it’s hard to sustain a company. Through crowdfunding, you have direct access to a market and are able to sell to your potential customers to secure pre-orders for your product. If you meet your goal, you have demonstrated market traction which forms the basis of any successful company. You can then use this traction to scale the business, either through further investment or sales. Crowdfunding enables you to attract buyers who are willing to pay you cash today for the promise of you and your team fulfilling it at some point in the future.
Brand awareness: If you launch a campaign right, you build an awesome tribe that follows your journey from here onwards. These are the people that are taking the plunge despite no guarantee of you fulfilling their order, all because they believe in you. They’re giving you their money on a promise and trusting you even though the product does not exist yet. You can’t build this type of bond between a buyer and seller anywhere else. Not only that, you get to create awareness amongst customers, industry leaders, journalists, possible hires and even investors.You’re also able to create brand ambassadors as people wanting your product understand that without a successful campaign, the product will not get shipped. This results in organic growth and engagement which fosters deeper and more meaningful relationships between you and your community.
Access to low-risk capital: The reason why alternative finance has grown so rapidly is because entrepreneurs are reluctant to give up equity or pay high interest on loans when first starting out. When you’re still deciding on the vision and direction of your company, it’s imperative that you do this on your own terms – this can only be achieved if the control stays with the founding team that conceptualized the original idea. Without investors or banks hijacking your vision, you can test the market and validate the need for your product by launching a crowdfunding campaign to collect orders. As there are no upfront costs and you only have to pay the platform if you succeed, you’re playing in low-risk territory.
Intros to potential investors/press/hires: Speaking to people or organisations who could put sizable sums of money towards your business is crucial for a crowdfunding campaign. This could make or break your campaign, and/or scale your business through investment. It also helps to completely hone your pitch before you start investment fundraising. If the power of crowdfunding is harnessed correctly, it can give products access to additional capital, major press or an opportunity to go ‘viral’. You’re able to be innovative and creative with your story and reach those customers big brands are unable to reach due to lack of storytelling.
Jeremy: How should a social entrepreneur choose which crowdfunding platform to use?
Sheeza: Depending on the nature of your campaign there are an assortment of crowdfunding platforms to choose from. When done well, crowdfunding is an experience that can not only provide you with a significant amount of capital to develop and build upon your business idea but it gives you market validation by letting you know that people are interested and are willing to support you.
Before you jump onto any crowdfunding platform, you should ask yourself a few questions to ensure that you have made the right choice. I’ve assembled a list of 5 as a starting point:
Who are you: Your crowdfunding campaign will be an extension of your goals, ideas and values. If you want to convince potential funders that you are someone worth supporting you have to ensure that you are portraying yourself as that. What does this have to do with the platform? You will need a platform that has features that can bring your ideas’ vision to life. A majority of crowdfunding platforms inexplicably cater to specific types of projects. For instance there are those that only accept projects in themes such as creative arts, community, real estate, biotech and then there are those catered for social good products or ideas. If your project fits into a category, it would be best to identify a platform that is congruent. The reason for this being that the traffic that is generated on a crowdfunding platform would usually derive from users that are interested and supportive of the overall ethos of their featured campaigns. Also, the skills and expertise offered by the platform will most likely be relevant to that particular industry.
Support: If you want your campaign to succeed, as with anything, you need to be willing to put in the work. There is a common misconception that once a project goes live on a platform, a horde of people will instantly appear and unload their wallets and purses. Unfortunately, this is not the case. This is why, you should look for a platform which provides support with your campaign. Good support offers guidance on creating marketing plans unique to your business, regular catch-up calls with a crowdfunding expert and access to a network of professionals from videographers, graphic designers, marketers and social entrepreneurs – this combination helps maximize the likelihood of your campaign being a success.
Which funding model do you want to apply? This is one of the most important choices to make when deciding on a crowdfunding platform. There are four main funding models: - Equity: investors fund your company in exchange for equity - Peer-to-Peer Lending: where funds that are invested are repaid over a period of time - Donations-based: where the funds are donated for a project, this tends to be for nonprofits and charities - Rewards-based: where funders receive a tangible gift or service in return for their contribution. It is essential that you are aware of the funding model of the platform you decide on.
The success rate of former projects: Although many platforms have had a plethora of projects featured on their websites, what really matters is how many of those have succeeded. The largest crowdfunding platforms in the market have a less than 50% success rate. This works in conjunction with the platform’s due diligence and support. If the crowdfunding platform does as much as it can to aid you, the more likely you are to succeed.
Technical Features: What technical features does your crowdfunding platform offer to ensure the efficiency of your campaign? In a technical capacity, there are many things that can be done by a crowdfunding platform to help your campaign. Look at how the platform handles payments, security, shipping, updates, communication and content before you decide on the right one. Funders need assurance that the process will be stress free and will run smoothly, crowdfunding is new for many and it should be easy for them to fund a campaign. The growth of crowdfunding has been immense and is projected to raise over $90 billion by 2025. There has been an emergence of various crowdfunding platforms, each offering to help those with different ideas and niche markets. Therefore, it is imperative that you find a platform that aligns with your mission and aims. Crowdfunding for social good products accounts for 30% of the overall market. It has helped better the lives of many people, and contributed to the solutions of a number of humanitarian issues.
Jeremy: What are the key components of a successful crowdfunding campaign?
Sheeza: Too often, entrepreneurs launch a crowdfunding campaign on a platform and anticipate “platform traffic” to convert into “campaign customers” and by the time the campaign is over, they feel like they’ve been let down. In their defence, the major platforms have done a poor job at educating the market on crowdfunding.
The number one tip and the most important tip from me would be to treat crowdfunding like any marketing launch - if you’ve decided to take a product to market, then be prepared to put in the hours to make your business succeed. Crowdfunding is a 30-day marketing campaign, it’s as simple as that. And in order to win a marketing campaign, you need:
- A killer team: be prepared to hustle like crazy during these 30 days and for that, you need man-power! You need every single plastic hater to know you’re in town with a shiny new sustainable material to save the day!
- Set realistic and achievable targets: it’s better to get flooded with funds than to not meet your target, in all-or-nothing campaigns, you won’t walk away with a dime if the latter.
- Spend a significant time on testing your reward packages prior to launch: get feedback from potential customers and identify the market trends
- Network: without an existing community, it’s almost impossible to succeed at crowdfunding. Build incredible and durable relationships who you can rely on to push your campaign on launch.
Jeremy: What is the most important piece of advice you would give to early-stage social entrepreneurs seeking to fund a startup?
Sheeza: Train your mind to treat failure as your saviour – without falling down, you can’t possibly know how to rise. There will be hundreds of no’s during your entrepreneurial journey, particularly when you’re asking for money but all it takes is one yes.
Validate. Without getting direct feedback from your potential consumers, you will never know how useful your solution is and no amount of funding can replace this step.
Figure out how the business will survive without public funding, grants and donations. Build a financially sustainable model for your social venture, your impact will be limited and short-lived without an independent revenue stream to keep you moving forward without spreading resources.