They say that grain does not make a barn, but it helps the partner, and more businesses or projects are based on this principle to take their first steps. Crowdfunding is a relatively new form of financing based on small but numerous contributions. In this article, we tell you more details to take advantage of its full potential.
What is crowdfunding, and how does it work?
Crowdfunding or micro patronage is a form of collective financing of projects consisting of resorting to small contributions from many contributors or patrons.
It is an alternative to bank loans to start a business and social activity, so it is especially interesting for small companies or projects with limited or no chance of getting into debt.
Currently, this type of financing is more deeply rooted in the social sectors (NGOs, health, education…), cultural (literature, art, cinema…) and content dissemination ( YouTubers, blogs, digital press…). It is also gaining considerable popularity among startups, such as the Exploding Kittens game. Some examples of crowdfunding are examples of companies linked to the development of rural areas and ecologies, such as Madrid Km Región and Apadrina un Olivo.
As we will see below, crowdfunding has various formulas, but it is always based on investor confidence. The main reason patrons contribute to the project is its social utility and positive impact, with which they feel personally identified.
For this reason, communication is a fundamental pillar in all crowdfunding campaigns. It is essential to make it clear at all times what amount of money you need, what you will achieve with it, and the progress you are making to achieve it.
Types of crowdfunding
Crowdfunding or micro-patronage initiatives can be grouped into four types, depending on the returns that investors achieve:
As its name suggests, the donation is solidarity crowdfunding, where investors do not expect anything in return for their contributions. They donate their money or resources solely because they identify with the project and want it to go ahead.
Donation is the type of crowdfunding that requires the most trust from contributors. It can work when the project has an identifiable social or solidarity purpose. It includes non-profit organizations, but it can also be viable for companies with a social initiative or strongly involved in the local development of an area.
In any case, if you have a business project that aims to generate profits in the medium term, it is best to offer some reward to your investors to increase their involvement. As we will see below, the possibilities to provide returns are varied, not only monetary.
They are crowdfunding campaigns in which patrons receive a non-monetary return as a reward for their contribution. That is, they do not recover the money invested but receive another type of reward.
Some of the most frequent rewards of this type of crowdfunding are:
- Project merchandising items, such as t-shirts, posters…
- Regarding publications such as books or magazines, copies are signed by the author.
- Visit the facilities and meet with the people who work on the project.
- Access to free or discounted products or services. Often the patrons of a crowdfunded company are also its customers. In addition, in many cases, will anticipate
- This access to services, so the opinions of investors will be of great value to optimize the project and the satisfaction of future clients.
It is the type of crowdfunding in which the money they contributed to the project is returned to investors, with or without interest. Debts contracted with crowdfunding campaigns differ from bank loans in their amount. Instead of signing a large loan with a single creditor, you turn to many small lenders who contribute smaller amounts of money. In this way, the risk for them is also lower.
The fact that there is a monetary return does not necessarily mean that the interest of the patrons is less or less generous. In most cases, they will lend their money because they identify with the project and want it to go ahead. Therefore, cultivating relationships with investors is just as important in this type of crowdfunding as in the others.
Sometimes crowdfunding campaigns complement credits and some banks promote this combination. For example, the Triodos Foundation has a crowdfunding platform.
Known in English as equity crowdfunding, it is another crowdfunding with a material return. In this case, investors become owners of a small part of the company they are financing, receiving shares or becoming equity partners. When the business goes ahead, they will receive the distributions of profits that correspond to them and will usually be able to participate in decision-making.
This type of crowdfunding is widespread in the Anglo-Saxon world, where specialized platforms such as Fundable exist.
Advantages and disadvantages of crowdfunding
Crowdfunding is a particular form of financing that has its advantages and disadvantages.
Strengths of crowdfunding
The main advantages of crowdfunding as a form of financing are the following:
- It is a compelling market study: When you opt for crowdfunding, it is the market that finances your business. Presenting your idea and seeing how your potential target audience receives it will be an excellent way to determine if there is a demand for your product or service. Also, as we explained in rewards crowdfunding, patrons can naturally become customers.
- Contributions are affordable for investors: The fact that each patron can decide the amount of their contribution quite freely reduces the risk considerably.
- It has great marketing potential: A good crowdfunding campaign, in addition to raising funds, will allow you to publicize your brand, products and services. Most likely, your patrons will become your followers on social media and sign up for your mailing list to receive your email marketing campaigns. Therefore, you will have a powerful output boost to promote your brand in the market.
Weak points of crowdfunding
Crowdfunding also has its limitations as a form of financing. These are the main drawbacks of crowdfunding to finance a business:
- It requires a significant initial investment in marketing: The success of a crowdfunding campaign is based on reaching a large number of people who can become patrons. It is necessary to make a great marketing effort from the beginning when you do not yet have many funds. Therefore, choosing the most effective communication channels and optimizing resources to spread your campaign is crucial.
- The return on investment generates uncertainty: Disinterested donation crowdfunding is not usual when financing a business. The patrons are still investors who expect some reward. It is necessary to know your expectations to plan a strategic return on investment (ROI) that responds to them in the best possible way and realistic terms.
- Competitors can plagiarize your idea: Financing through crowdfunding requires presenting the business idea publicly from the outset when the company does not yet have the resources to function. You’ll need to provide enough detail to build public trust and patronage, so there’s a risk that a competitor will copy your idea or parts of it.
Crowdfunding platforms to finance a business for entrepreneurs
The development of crowdfunding is linked to the Internet for obvious reasons: it is the most effective channel for reaching large numbers of people. Virtual platforms allow online fundraising for crowdfunding campaigns. Here are three crowdfunding websites you can use to finance a small business:
It is one of the crowdfunding platforms with the most significant presence in Europe and North America. Most of its campaigns have a social and solidarity purpose, but it also includes a specific section for businesses.
The operation of GoFundMe is quite intuitive: you have to create an account, start a campaign, set a funding goal and spread the word about the project by email and social networks to start accepting contributions. In Spain, GoFundMe charges a commission of 2.9% + €0.25 for each transaction made with a bank card or PayPal.
At the end of the campaign, all the funds raised can be recovered, whether or not the established funding goal has been reached.
It is a popular crowdfunding platform with particular roots in the Anglo-Saxon world. Kickstarter is a website focused on creative projects that have already funded more than 150,000 initiatives. It has more limited rules than other crowdfunding websites:
- Kickstarter uses an all-or-nothing funding model; if the project does not reach the expected fundraising goal, the money is returned to the donors. It forces you to think carefully about the financing objectives you set.
- Funding should include remuneration for the project creators to avoid personal burnout.
- May raise no money for personal use or a charity. Non-profit organizations can launch campaigns as long as they are creative projects.
Kickstarter is funded by a 5% platform fee and a 3-5% payment processing fee. No commission is charged if a project does not reach the funding goal within the stipulated period.
It is one of the most famous crowdfunding platforms in Europe. Founded in 2010, Ulule is powered by rewards crowdsourcing; it is mandatory to offer a return to those who contribute to the project. It is mainly used for artistic and creative projects and has financed 30,000 initiatives.
Ulule also works with the “all or nothing” system: it is necessary to get all the money planned, and if not, the project is considered not possible, and the money is returned to the patrons.
In Spain, this platform charges a commission of 8.1% for payments by bank card and 5% for payments by bank transfer or check.
Communication: a fundamental pillar of crowdfunding
Cultivating relationships with your prospects —whether they are patrons or not yet— is especially important in these campaigns, based on trust rather than the value of the products or services offered. Therefore, communication has reinforced its importance in all phases of the project.
First of all, potential patrons will want to know the history of your project in a clear way and without neglecting the human component, which will allow them to empathize with the idea. It would help if you used storytelling techniques to make the message concise and clear. A good practice is usually to accompany the presentation with a short video.
After the initial presentation, efforts must continue. The marketing campaign should have a specific duration to close contact with your potential investors and reach other people who are not yet aware of the project.
The potential of email marketing in crowdfunding
Email is the channel with which marketing investment is most optimized, and crowdfunding campaigns are no exception. Email marketing has great potential to encourage the personal involvement of prospects that a successful crowdfunding needs:
- Lead nurturing campaigns that combine informative and human content and updated information on the project’s development will help build trust in the recipients and get them to become investors.
- The informative tone should prevail over the promotional one in the emails you send to your subscribers. Remember that their motivations are different from the ordinary purchase decision. The informative bulletins or newsletters with the novelties of the project must have an essential role in the shipments.
- Probably, you will have very different types of contacts on your mailing list: patrons, clients, subscribers who are not yet… It is not usually a good idea to address everyone in the same way. Segmenting your mailings will be necessary for your messages to be relevant.
Naturally, social networks also have great potential to complement these efforts and stay in touch with your followers. Depending on your target audience, you may be more interested in using Facebook, Instagram, LinkedIn, Telegram… The most important thing will be choosing well and optimizing your time and efforts to strengthen your community.
In short, crowdfunding projects are a form of financing that entails risks. Their suitability depends on the type of business or project. If you resort to this, you will have to deal with considerable initial uncertainty. However, suppose your crowdfunding campaign achieves its goals. In that case, your business will be born with an invaluable strength: a community committed to it from the start.