Crowdfunding Startups


Crowdfunding for Startups

Crowdfunding startups is increasing popular and accepted.  Start up businesses need infusions of capital.  This may happen because initial start-up funding is used up, expansion outpaces the business’ ability to raise new capital, or the business is still pre-profit and needs money to continue.  One way or another, startups have often needed to go back to their bank over and over to get new funding or to expand their credit lines.  Now crowdfunding for startups has started to offer a new possibility, one that allows the company to turn to a new source of capital.  While we use the terms interchangeably it should be noted that “crowdfunding for business loans” refers to peer-to-peer lending that has a payback schedule, while “crowdfunding” for business grants” is the type of giving that does not always require payback but might mean that the investors get some sort of perks.

Types of Crowdfunding Startups:

The crowdfunding startups concept is based on investors assessing the likelihood of success of a potential investment in something new, and deciding that investing money in this way is low risk and high reward.  Thus the ways that this funding is often used includes purposes such as the following:

Crowdfunding startups is done to help a company expand into a new geography, whether that means opening up a new office or shop, or just reaching further with the existing one

Crowdfunding for startups may also be used to help a company expand by offering a new product or product line within the existing geography or store when they are still close to startup but have grown a little

Some startups use peer-to-peer lending to improve the current product or service in a way that requires additional capital, and this can include a rebranding when the initial launch did not go as well as hoped

Some crowdfunding for startups is used to provide a capital boost in another way such as a marketing campaign, change in packaging, or hiring a new staff specialty

– And finally, this crowdfunding for startups might be used to improve the efficiency of a manufacturing business or the quality of the consumer experience in a retail business

While the above uses are for companies already producing a product or service, crowdfunding startups is sometimes made at the time when things are just concepts as well.  In this case the investor sees potential in the hypothetical small business.  Usually a business plan and other research is presented and the investment is based on an analysis of whether the business is likely to be successful.

Even larger companies might approach crowdfunding business loans or grants in order to expand – to increase the size of a whole business or an existing business segment, or to pay for a launch of a new product or service – again, the investor is expecting success and the terms and rate may have a lot to do with the chances of success.  For example, the crowdfunding for business investor can assess a business expansion possibility based on the success the business has had on a smaller scale.  Perhaps the investment can be made in steps as the business expands gradually to reduce risk and allow for interim assessment.  In addition, investors may prefer to make loans for things that can be undone or sold, for example for a new warehouse or transportation fleet that can be sold, or more office space with a lease that can be broken.

Applying for Crowdfunding Startups

Advantages of Crowdfunding Startups

There are many advantages of crowdfunding startups.  The most obvious is that this type of peer-to-peer lending opens the door to types and sometimes even amounts of funding that would otherwise not be available.  Sometimes a business is too new to qualify for much of a credit line from a bank, or maybe not enough equity has been built up for a traditional loan.  The other major advantage of crowdfunding startups is that you might develop more of a lasting and perhaps deeper relationship with your investors, one that can persist through different product or service launches or expansions.  Smaller benefits include an ability to access money more quickly, the potential to have a built-in test group to run things by, and the additional PR that you can gain when your investors spread the word about your product or service.

Of course there is also the math involved with crowdfunding startups.  Unlike traditional loans you may be able to get more favorable payback options with this choice, or at least some creativity in how and when you need to pay things back.  You may be able to borrow a little at a time, just like having a credit line, but with more favorable terms than with a credit line.  In addition, you may be able to more quickly and easily flex that credit line if you are successful or a new change or addition looks promising.

Disadvantages of Crowdfunding Startups

The main disadvantage of this type of business funding is how hard it is to get in the first place.  You will be competing against many other businesses with many new products and services that they hope to get funded.  As opposed to a bank that will consider all requests before making a decision, and could potentially fund a high number, your peer-to-peer lending quest will be in competition with many different companies.  The other disadvantage is that the money may come with many strings attached – different reporting than you’d need to do with a bank and the need to follow-up with certain perks.  You may have to put more work into this type of funding overall.

Keep in mind that any time your funding includes giving up any equity the disadvantages enter another territory, with the possibility that you will give up far too much of a valuable product or entire company a distinct possibility.  We cover equity crowdfunding elsewhere, and for the purposes of this page we are covering only peer-to-peer lending that has more traditional payback options.

This recent article describes the importance of crowdfunding for startups and this article from Entrepreneur discusses crowdfunding startups investing.

Initial Steps to Crowdfunding for Start-ups

Here are the general steps that you will need to take if you are applying for crowdfunding for start-ups. Some of these are quite general because the detail will come in the interaction between your chosen website and your need:

1. Organize yourself and know exactly what the funds will do for your small business. Make sure you can clearly explain what a crowdfunding for startups investment would allow you to do specifically. This will help you arrive at the correct amount of your crowdfunding for startups, and will clarify in your own mind exactly what you need. Of course it will also provide you the motivation necessary to assertively pursue your funding! You really need to come away with a solid elevator pitch, one that is both clear and compelling. Try it out on friends and colleagues, and refine it to the point that it is perfect and concise. Keep in mind that potential investors in crowdfunding for startups are looking at websites that have tons of possibilities. You only have a few virtual seconds to make your pitch.

2. Find the most appropriate crowdfunding for startups organization or website. Look for a startup crowdfunding website who has been around for a while, seems to fund projects like your own, and has a track record of finding funders at the level that you need them. When you’ve arrived at just a few, compare like you would a bank loan – interest rates and terms. Look for projects just like your and see whether they have been noticed and funded, but be careful if the competition will be so strong that your project will get lost in a bunch of like projects. This may be the most important step in your path to getting crowdfunding for startups but also keep in mind that you can change websites if you need to.

3. Carefully fill out all material you are asked for about your project or service. Make it incredibly compelling but also detailed as far as why you need crowdfunding for startups. In other words, appeal to both the right brains of the investors and funders who want to know how great you could be, and the left brains who want to know exactly where the money is going in order to get you there. After your clear and concise elevator pitch reels them in, you then need to make sure you provide potential investors in crowdfunding for startups enough information to decide whether your project is not only a great fit for them, but also something that has been well thought-out and conceptualized by you.

4. Use multimedia in your crowdfunding for startups pitch. This not only is a great way to show off your product or service, or even yourself, but also a way to show the potential person to person lenders that you are technological capable and motivated to go beyond the written word. Spend time with compelling pictures and video. Not only does this help truly give an in-depth picture of your project or service, but it also shows how innovative and motivated you are to spend time promoting it. Those looking to invest in crowdfunding startups will be impressed by a multimedia presentation and may also be tempted to share it with others.

5. Keep in touch. Sometimes potential investors in crowdfunding for startups do not make a decision on their first or second pass through a website, and instead will bookmark certain promising projects to come back to. They will be looking to see if there is new information posted and how the initial steps are going. Of course you may need their funding before you do too much, but if you can try out your project pr service on a small test group, do some market research, refine your marketing plan, or generally update your plans this can help the investors not only understand your product or service better, but also will show that if they do invest in you that you are motivated to work hard on the project.

Later steps in Applying for Crowdfunding for Startups

As the crowd assesses your potential project you will likely be asked for additional information. Make sure you are thoughtful, diligent, and fast in getting the information to the prospective crowdfunding for startups investors – not only do you want to make sure they do not lose interest, but also make sure they see how you will respond when day-to-day challenges require you to do something. Try to understand from their request what their concern might be and proactively answer both the direct question and any underlying concerns.

When you receive your crowdfunding for startups investment it will not be without strings. the crowd will want updates and information about how things are going. They may not release all the money at once, so you may have to continually prove that your project is viable and on track. Put as much effort into follow-ups with the crowd as you did when you originally got the money so they stay interested and motivated, whether merely to give you the rest of the loan or if you need to go back for more funding in the future.

One of the over-arching goals of the crowdfunding for startups process that many small business owners overlook is that you want to end up with investors who remain interested and engaged so that you might go back to them as your business grows and expands. Keep that in mind and you will find success even beyond what you originally thought.

If at First…

One of the hardest decisions you will need to make when it comes to applying for crowdfunding for startups money is what to do if your project does not get funded despite you taking all of the above steps. Of course you still consider your project meaningful and compelling, but for some reason the crowd is not (literally) buying in. There are really three options at this point:

1. Change something about your pitch. In other words, add a perk to the investors or even go as far as to raise the rate you are willing to pay or the amount of equity you will give up. Add other products into the mix of what the investors will get if they buy a certain amount of equity in your crowdfunding for startups pitch. All of these options and more fall under the category of significantly changing your pitch as far as the actual benefits to the investors.

2. Change you crowdfunding platform if you think that a different website might attract different investors. This step will only work if there is a good reason to do this – did you notice that another crowdfunding website seems to present pitches differently, or attract exactly the kind of investor you are looking for. Does the new crowdfunding website truly give you a better chance at attracting the investment you are looking for. If so, then changing crowdfunding platforms may be worth it.

3. Change the type of crowdfunding you are pursuing. Of course this is the most radical step, and might involve changing from a peer to peer loan to an equity crowdfunding pitch, or vice versa. Or maybe you thought you could simply give insider perks but now you need to give a little equity or pay back.

Conclusion

For an investor, the idea of crowdfunding for startups is quite exciting. They can hope to choose the idea or company that has the most potential, and therefore there is the perception that they can make a lot of money this way. This approach by the investors puts more pressure on you to make sure they do see the potential in your product or service, but you cannot make the mistake of over-promising. Remember that this is a long process and you could lose your funding if you cannot meet the goals you have set over time. The balance between keeping the investors excited about your product or service without overdoing it is the key to success. Also keep in mind that ideally the crowd becomes interested in continuing to fund new ventures after your company is no longer considered a startup, so you need to keep them engaged and interested even after your product or service has rolled out. If your funding is of the equity type (rather than just a flat amount with a fixed payback) you will be related to these investors for a long time.

We welcome additional information, especially from those who have invested in crowdfunding for startups using the comments section below: What attracted you to the project or purpose you funded? What are you looking for now? What advice would you add to this page about crowdfunding for startups?

Investing in Crowdfunding for Startups

Investing in Startup Crowdfunding holds great potential for both small and large investors. You may be here wondering whether entering the world of startup crowdfunding is a good investment to add to your portfolio. The choice may not be as difficult as you might think. If you are careful in choosing a company or product that is diligent in giving you the information you need, and in screening crowdfunding startups applicants carefully, you should do well. But first you need to decide if this type of investment is for you, and that involves three basic questions:

1. What returns are available to you on other forms of investment? In other words, look at the rates your money would earn in more traditional investment instruments and decide whether that is satisfactory. Whatever your goal is as far as money you’d like to earn, are you likely to meet it now? If you feel your current investments leave you short or that you can carry a few higher risk/reward choices in your portfolio, startup crowdfunding may be a good choice to look into.

2. Are you looking to add diversity to your investments? Perhaps you feel like your current returns on you investments are okay, but you are not investing in enough instruments to ensure that if one of your investments gets hit, there will be others protecting your total return. Of course investing in startup crowdfunding adds more risk to your portfolio and also more reward, so you need to calculate whether this is a potential a good move for you.

3. Finally, how much risk are you willing to take on? A startup crowdfunding loan may be more risky than some other investment strategies and the payoff must be assessed in relation to this. That said, investing in startup crowdfunding may also be a way to lower risk on more risky portfolios. You might choose to also pursue lower risk choices for other parts of your total portfolio to balance your choice.

How to find a Startup Crowdfunding Investment

These are the core questions a potential investor needs to ask before investing in startup crowdfunding. Assuming the answers point in the direction of an investment, the next step is to choose how to find a solid investment. Once again we find three steps involved:

1. Look for a crowdfunding startups investment website or platform that has been around for long enough to give you information and statistics about risk and reward – what is the percentage of their loans did not default. You want to know that the site carefully screens applicants and that companies with attractive pitches do choose that site.

2. Look for a crowdfunding for startups investment house that offers a wide variety of choices for your investment. You want to choose among types of company, product, service, or purpose. You may want a mixture of large and small, and individual and group pitches.

3. Look for investor reviews of how easy (or not) the crowdfunding for startups site is to use and how responsive they are. You want excellent service not only from the business or person you are investing in but also the broker – the website – through which you will be doing this business.

The next step in investing in crowdfunding startups is literally choosing the investment you will pursue. This may be relatively easy if you know specifically the type of product or service you want to promote, and harder of you are merely looking to generally add startup crowdfunding to your investment lineup. If you are closer to the latter you may want to carefully write down exactly what you are hoping for, the criteria you will use to choose among the finalists, such as:

1. Make sure that the pitches answer all your questions. As a crowdfunding startups investor you have the right to know all the details about your potential choices. Don’t make any assumptions and push the applicant to be thorough and clear in all areas. A positive sign as far as a potential investment is that the applicant has thought things through. In other words, your questions can help on two levels, first because you literally want the answers, and second to show how much thought and research has gone into the pitch.

2. Do your own research. Many applicants will tell you about the market research they have done – what competitors they have, how many similar products or services there are out there, and what the market will be willing to pay for the product or service. In most cases this information will be accurate and true, but you may want to do a little research yourself, or at least ask for details as far as the methods they used to get to these numbers.

3. Research both the product and the people before investing in startup crowdfunding. You may feel great about a product or service but be disappointed in some of the characteristics of the people (lack of sales experience, nit outgoing enough to really carry a marketing plan forward, etc.), or you may feel that even a slightly less exciting product that is backed by incredibly talented people has a good chance. Of course ideally you would find a superior product that is being promoted by incredibly talented people for your investment, but this is not always possible.

After You Make Your Crowdfunding Startups Investment

After you’ve gone through the above steps to choose the right crowdfunding for startups choice to invest some money in, do not lose touch with the company you have invested in. Ask for updates if you do not get them automatically, and do not be afraid to ask questions. Push the company to be transparent about how they are doing and whether they are meeting the goals they set. Perhaps you did not invest all that you eventually intend to, and you want to be ready to put more money on the table if you like what you see. Conversely you may want to assess whether you should sell your equity share (if this is possible) if you are concerned about what you see. Just like any investment you not only want to track the performance but also the underlying strength of the company and the success of its philosophy as it moves forward. Additional steps you may need to take with this types of investment is watching the marketplace for competition, in some cases keeping track of regulatory changes that could affect the product or service, and seeing what alternatives emerge for consumers.

Investing in Crowdfunding for Startups: The Bottom Line

In the end you may choose a crowdfunding startups investment based on a gut feeling. Hopefully you have used the above advice and other information to narrow your choices, but at some point you may just have to decide between a few choices using a bit more subjective criteria. That is perfectly okay, particularly if you have used a little science to narrow things down and now you are presented with a few equally compelling crowdfunding for startups choices.

CNBC has an article predicting the strong crowdfunding for startups and Business News Daily covers Crowdfunding startups sites

Please share any additional advice you have below if you have been someone who has entered the world of investing in Crowdfunding for Startups or if you have applied for Crowdfunding Startups previously.