by Philip Shepherd - 13th March 2015
There seems almost no downside to crowdfunding campaigns. Crowdfunding is relatable as you, the investor, help out a person or business with whom you then get to know through crowdfunding websites. They offer details of themselves and their product and you offer them money to help fund their dream.
Let me first explain a bit about how crowdfunding works:
A potential company asks backers for money on crowdfunding websites. This money will help fund the design, production and marketing of their product, while you will get some perks in return for investing. Imagine a company selling a super smart techy pencil. The pencil will sell for £50 when launched… must be some pencil! If you invest £5 you get a signed drawing of the pencil by the creator. If you invest £20 you get a t-shirt with the pencil on. If you invest £40 you get one of the first pencils when they are made. If you invest £100 you get 5 pencils. If you invest £200 you get to come and meet with the pencil designer and see how the product is made in a factory. This list goes on, but you get the idea. You are being offered perks for your investment. The company is trying to presell their product to you, the backer.
It is this idea of “Pre-Selling” that allows the crowdfunding community to really get bang for its buck. It benefits both the company and the backer. The backer gets the community support, the feeling of helping out someone feels good and they get the product for a lower price than market retail. The seller gets cash up front.
This upfront money is how crowdfunding differentiates from normal cash flow. Usually a business has to stump up a ton of money to the designer, find a production facility, and do the marketing months or years before it starts to get money in from sale. If you don’t have deep pockets of willing investors, you will struggle to get up your product to the market. Crowdfunding helps fund these upfront costs.
We are living in a world that is highly connected, but despite this it is still hard for a small unknown, company to get its face out there and get support for their product. Crowdfunding allows for this. The people who you are appealing to on the various crowdfunding websites are actively looking for things to invest in. They are effectively trying to find you.
The trajectory and ability to remain independent is what makes crowdfunding so important and essential to up and coming companies. For these companies, crowdfunding seems a better option than traditional marketing, at least for the start. Even established companies can feel the benefit of crowdfunding – although it can be harder to persuade potential backers that you really need their support.
In this brief explanation of crowdfunding, I hope you can see why this new way of raising funds is so exciting and how it transforms the ability to bring your product to market quickly. Contributors help to build your company, and this sense of community is what crowdfunding is all about. You immediately land customers and you know the depth of your customer base well in advance. It is also providing access to funds at a time when traditional options such as bank finance or venture capital are getting harder and harder to come by.
Crowdfunding allows backers to get bang for their buck and gives companies a huge presell advantage.
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