Hello and welcome to FYI.
In the last four posts, we covered business funding options and delved into the worlds of bootstrapping, debt financing, and equity financing. This week brings the concluding installment of our five-part series. It’s about Crowdfunding as an innovative source that focuses on the customer.
So what is crowdfunding?
Simply put, crowdfunding is the process of raising money through small contributions from a large number of people during the startup process. In the past decade, it has been successful in funding sectors as diverse as music, politics, IT, scientific research, and journalism. And while platforms like Kickstarter and Indiegogo are leading the online revolution, innovations in real estate finance have promoted a rapid shift in the industry offline.
How does it work?
The entrepreneur sells his idea or project to the public via a neutral platform (usually a website) to prospective customers (the crowd) and receives donations towards meeting a funding target. Depending on the cause or project, the entrepreneur will also set contributory terms such as reward, debt, or equity and offer commensurate returns accordingly. It is this particular capability of being set up as debt or equity financing or even providing an avenue to escape the drawbacks of both that has made crowdfunding a game changer. Additional flexibility allows the entrepreneur to offer to return individual contributions if the funding target is not met and the project doesn’t go forward.
And how do you decide on a crowdfunding campaign?
The best campaigns offer donors the right incentives to attract investments. It is therefore your target donors and their interests that will determine how you design yours.
For innovations, reward-based campaigns will generally offer free products, discounts, or first-purchase options to contributors. Credit-based campaigns are used to finance projects that will generate enough money to pay back debt and remain sustainable, while equity-based campaigns are used to finance projects that will generate enough profits to be shared with donors. An additional charity-based campaign may be used to finance philanthropic causes where the donors do not even except anything personal in return. Such projects may include potable water supply in rural areas, disaster relief, or local drug research for epidemics.
Fundamentally, a decision on crowdfunding should be based on an understanding that it is fuelled by innovations in marketing and competition. Donors will only contribute to causes or projects that offer innovation or rewards, solve problems, or promise social identification. These qualities allow each donor to view himself as a customer, individually drive awareness, and help mobilize the funds needed for the project to succeed. As such, crowdfunding campaigns must be set up to trigger the right donor emotions. This usually means a touching storyline delivered with the right words and captivating visuals.
And here’s the good news for African entrepreneurs. An African crowdfunding solution called Funda Solva was launched this year. And according to its website, it has successfully raised close to twice the initial funding target for Solar Nigeria; a project that intends to source solar cells and wiring materials from Nigeria and build solar panels.
So what are you waiting for? With several options through bootstrapping, debt or equity finance and now crowdfunding, the last thing that should hold back your business is funding.
Editor’s Note: A version of this article first appeared in The Business Hub on 20th August 2014.
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