Crowdfunding is a donation by numerous backers to your early product. You’ll probably already know this, but it’s important to see it in writing. Why? Because often things can be too good to be true. Now I really hate being negative, but when it comes to making your ‘light-bulb moment’ a reality, its necessary.
Let’s start by looking at why crowdfunding can be a fantastic thing.
Off the back, it’s a great way of creating a solid base of loyal followers who are dedicated to improving your business. The initial feedback you get from these donors is a great way of seeing how your concept works out in the open. It can also be useful in helping you envisage a clear trajectory for your startup.
The most important part of your crowdfunding campaign is your organisation’s page. It’s here that you clearly communicate your brands mission. The passion that you have for your product has to be recognisable as it’s this page that’s central to securing potential backers.
Okay, so we know all this. What should you be wary of?
There's a lack of Due Diligence.
What crowdfunding is great for is that it rewards people who are smart! Anyone with a small amount of capital and interest in your business can participate. This allows for a diverse investor base, which in turn means you’re getting a number of varied viewpoints.
But, these numerous investors can easily be susceptible to incompetence because of the lack of information they’re given.
Basic facts, information and risk factors are published on your organisation’s page. It’s from this information alone that a backer must decide whether they want to part with their capital. Though there is a lack of Due Diligence.
But how does this affect whether people decide to invest in my business?
Due Diligence is the investigation of affairs completed by an investor before they decide to write that tasty cheque for your business. Because crowd funding usually only permits people to make a small investment, Due Diligence isn’t carried out.
- Well, it’s firstly down to time constraints. If you have over 100 potential investors, it isn’t practical to answer all their individual questions over the affairs of your business.
- Secondly, there is a lesser level of risk as the backer is only submitting a smaller stake, so it’s not really worthwhile.
Crowdfunding allows for entrepreneurs to really push boundaries.
Surely this is a good thing?
Crowdfunding means that entrepreneurs aren’t constrained to payback windows. They can pursue business models that are innovative and highly creative. However, the flip side of this means that more mad ideas receive backing, which greatly decreases the success of crowdfunded startups.
Yes, I’m sure your idea isn’t mad. But what this means is that there are an increasing number of crowdfunding startups failing. While the small stakes that investors contribute limit their loss, too many crowdfunding failures can lead to the tightening of regulations. More importantly though is that these failures can turn disenchanted investors away.
You’re accountable to investors
Unlike conventional investing, crowdfunding means that you’re accountable to investors from day one. This is a tough pill to swallow.
This can be an added pressure to you, so it’s important that you set up clear boundaries. You need to know what the expectations of your investors are going to be. Give them a very clear timeline and account for pitfalls to avoid disappointment. Nobody likes a crying investor.
It’s also good to know how often they’d like progress updates. Are they going to require these every month? Every week? Being clear on issues like this builds good relationships. After all, it’s because of them that you’ve managed to get your business up and running.