Crowdfunding is a concept that exists since the 18th century when the associations were asking the population for money. Subsequently, with the development of Internet, particularly the Web 2.0 and the digital age, crowdfunding grew up.
Usually, a company that needs financial assistance asks for a credit. However, entrepreneurs, start-ups and small and medium enterprises are too risky. Consequently, loan companies do not lend credit to them, or only by requiring a high interest rate. For these enterprises, one good alternative can be the crowdfunding.
What is Crowdfunding?
It is a way of raising money using web platforms to connect someone who has an innovative idea or a business project with the maximum of potential investors, all that with a high level of visibility.
In 2015, $34 billions were raised via crowdfunding
We identified 4 main models of crowdfunding:
According to their moral and ethical values, people can give money to a project; it is the Donation model. (Ex: Gofundme)
In the Pre-order model, people who are interested in an investment can pre-order startups products with a price advantage, with a pledge or a contribution. If the startups don’t achieve their goals all contributions have to be returned. (Ex: Kickstarter)
Crowd can invest in a startup and gets satisfaction of helping and pre-defined rewards without ownership in the company, with the Reward-based model. (Ex: Indiegogo)
The last and the newest one is the Equity model in which, in exchange of their participation, investors receive financial return, as an access to traditional investment for everybody. (Ex: Seedrs).
There are almost 1000 crowdfunding platforms in the web with a variety of other models
Why should entrepreneurs do it? Or not…
You have to be aware that there are benefits and disadvantages that correspond to each of the 4 models seen above.
Below we present to you the main pros and cons of crowdfunding.
The main pros:
- Crowdfunding is a substitute option of banks and other traditional techniques of funding
- It is a great marketing instrument because it is a way of doing social-media-marketing. In fact, it’s a free way of introducing a new product, a message and some information to the future customers via the world-wide-web. Via social-media-marketing techniques, we can touch many communication channels all over the world. Moreover, if your crowdfunding project is a success story, it will attract the media and then you will maybe have an article about your project. This can be another way to be well-known.
- Crowdfunding can also be a way of realizing a brainstorming. In fact, people who are looking for money via a crowdfunding platform will have different feedbacks and comments from people coming from other countries. These feedbacks are a real advantage for people who are making crowdfunding because they can bring some new facets and ideas to their business project. Moreover, when people (from all over the world) bring you new ideas, your crowdfunding project can be refined. All these aspects brought by the brainstorming are possible because of the development of Internet and the digital age.
- It is a really good approach to know if your project is good or bad – if your project will be successful or not through the reactions of the different funders. It’s a way of analyzing the market before launching your project/product.
- The people who give you money during the crowdfunding campaigns are called the “Early adopters”. In fact, these persons will likely be the first ones who are going to buy your product. They will be your first clients. Moreover, you will have your fist customer data and contacts by accessing to their online profiles, available thanks to the digital age.
The main cons:
- In order to get the public’s attention, the project has to be very well built. Consequently, significant explanation and a good pitch are required. It takes time to create an attractive project!
- If your crowdfunding project fails, this will damage your reputation and your brand image. In fact, since the digital age has emerged, people can add comments very simply on the social networks and they can easily take big proportions. Thus, the public commitment to your project will be lower if the comments are negative and higher if the comments are positive.
- Your crowdfunding project has to be protected by a patent or a copyright because your project can be stolen by malevolent people.
- Since the beginning, you have to be aware of the commission fees of the platforms to avoid surprises later.
Whilst you are busy with your business plan, be sure you do not forget any important steps to have a strong and systematic basement before bringing your business idea into reality, by following the crowdfunding campaign checklist!
If they succeed, why not you?
- C. Barnett. (June 2015) Trends Show Crowdfunding To Surpass VC In 2016 http://www.forbes.com/sites/chancebarnett/2015/06/09/trends-show-crowdfunding-to-surpass-vc-in-2016/
- N. N. The Benefits Of Crowdfunding https://www.fundable.com/learn/resources/guides/crowdfunding-guide/the-benefits-of-crowdfunding
- T. Prive. (October 2012) Top 10 Benefits Of Crowdfunding http://www.forbes.com/sites/tanyaprive/2012/10/12/top-10-benefits-of-crowdfunding-2/#5c498f0e371a
- N. N. Crowdfunding: Advantages and disadvantages of Crowdfunding https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-crowdfunding
- K. Knipp. Benefits and drawbacks of Crowdfunding https://www.bigcommerce.com/blog/benefits-and-drawbacks-of-crowdfunding/
- M. Zwilling. (February 2015) Will These 5 Models of Crowdfunding Replace Angel and VC Investors? https://www.entrepreneur.com/article/242767
- G. Press. (February 2015) 15 Most-Funded Crowdfunding Projects On Kickstarter And Indiegogo http://www.forbes.com/sites/gilpress/2015/02/16/15-most-funded-crowdfunding-projects-on-kickstarter-and-indiegogo/#485cb6987ba9
- N. N. (June 2015) Histoire du Crowdfunding http://www.inidev.net/inidev-magazine/crowdfunding/l-histoire-du-crowdfunding
- E. Bonnie. (September 2014) Your Complete Crowdfunding Campaign Checklist (Infographic) https://www.wrike.com/blog/your-complete-crowdfunding-campaign-checklist-infographic/
By Gabin Gravier, Marine Paquet, Audrey Neirinckx and Phuong Chau Ngo