8 questions every business should ask before crowdfunding
8 questions every business should ask before crowdfunding
It’s easy to think of crowdfunding as a miracle alternative to the more traditional options for raising finance; but the majority of attempts fail.
By Eoin O'Hara
When considering crowdfunding one would be forgiven for taking a somewhat optimistic outlook. But did you know that the vast majority of business crowdfunding campaigns fail?
You probably didn’t because on a daily basis we are treated to media coverage of roaring successes, those campaigns which vastly outperform their creator’s wildest expectations and lull the rest of us into assuming that crowdfunding is indeed the answer to everything. The spectacular failures don’t make it into the headlines, but quietly fade away as the creators wonder where it all went so wrong.
Of course the reasons that a crowdfunding campaign might fail to reach its target are numerous, but we can suggest with confidence that lack of preparation on the part of the campaign organisers is one of the most common reasons for failure.
The apparent simplicity of the crowdfunding mechanisms create a perception amongst startups and growing businesses that little consideration is needed before launching into a campaign, when in fact nothing could be further from the truth. Whilst a failed crowdfunding campaign probably won’t spell disaster for your enterprise it can be a harrowing, embarrassing, and dejecting experience.
In order to help you in preparation for launching a crowdfunding campaign, here are 8 questions that you ought to reflect upon as a matter of priority.
Q. Should you opt for an equity-based crowdfunding platform, or one that is based on a system of rewards?
This is perhaps the most pressing issue for anyone who is considering launching a crowdfunding campaign, and rightly so. The decision could affect your business for years to come and may ultimately have an impact on ownership and structure in the future. Thus thorough investigations are needed to discover which is best suited for your enterprise.
Key in making this decision is the next question...
Q. Which crowdfunding platform will you use?
You are probably already familiar with of some of the most prominent crowdfunding platforms, but be aware that stature within the industry doesn’t necessarily equate to a better chance of success. Different platforms attract different audiences and this is ultimately what you need to be mindful of in making your decision.
Generally speaking most crowdfunding platforms will have either a technology focus, or a social impact focus so choose the one which has the best synergy with your enterprise to have the best chance of success.
Choose the crowdfunding platform which has the best synergy with your enterprise to have the best chance of success.
Q. Is your business really suitable for crowdfunding?
By its very nature, crowdfunding demands that campaigns are appealing, either because of the innovative or disruptive potential of the business or because of the mass appeal of the product or service. Campaign momentum is often created and maintained by how engaging your idea is, so if you fail in creating this buzz it can be very difficult to deliver a successful outcome.
Q. How much money are you going to ask for?
It’s easy to just pluck a random figure out of the air, but this is a very unwise move.
Remember that most crowdfunding platforms operate on a system of ‘all or nothing’ meaning that if you fail to accumulate every penny of your target total, you get absolutely nothing.
Setting a target which is too high can leave you struggling to reach it, whereas setting one that is too low can leave you without enough capital. Some crowdfunding platforms do allow you to fund beyond your target, but many still don’t; setting a target figure which has been carefully calculated based on costs will help ensure that you don’t miss the mark.
It’s worth remembering also that crowdfunding platforms work on a commission basis, so you will need to factor in a certain percentage of the proceeds to deal with that.
Q. Are you confident in your ability to synthesise the necessary information about your business?
Simplicity is one of the cornerstones of crowdfunding success because when an investor can identify the unambiguous value of what you are doing, they will be much more likely to invest than if your campaign is convoluted and complex.
Q. Do you have a clear vision of how you will spend the money?
This is important to have in all crowdfunding campaigns, but particularly when it comes to equity-based crowdfunding, as investors want to be reassured that the money will be used for the growth and development of the business and not just to maintain it as it currently operates. This should not be an afterthought of the campaign, but rather the stimulus for it; the best crowdfunding campaigns are those that grow from a firm desire for business development, with a clear strategy of how to achieve this.
Having a clear vision of how you will spend the money if your campaign is successful will also give you the opportunity to focus your efforts on ensuring success with a plan of action for the end of the campaign.
Q. Can you deliver on the promises you make?
This is important within equity-based crowdfunding, but uniquely so within the rewards based model. That is because this system operates on a contractual agreement that certain ‘rewards’ will be given to investors based on the value of their contribution to the campaign.
In retrospect many businesses find themselves somewhat overwhelmed by the rewards they have promised to deliver, so ensure that the promises you make are ones that you are realistically able to keep, and won’t use up all of the money you make.
Ensure that the promises you make are ones that you are realistically able to keep.
Q. Is this the right time to crowdfund your business?
I have saved this one for last because if you take nothing else from this post, let it be this!
Crowdfunding is so readily accessible that people often don’t consider carefully enough whether their business is at the optimum stage of development to reap the greatest rewards from the process. It is a difficult one to gauge but taking a commonsense approach to the question is the best way of avoiding any untimely mistakes; if you have major concerns about whether the timing is right, then it probably isn’t. This is where it can be useful to enlist the support of someone who has direct experience of crowdfunding a business venture as they will often be able to provide valuable insights that could prove instrumental when considering your readiness for launching a campaign.