Crowdfunding allows entrepreneurs to raise capital from a large pool of individuals, either in exchange for a product or company shares. The internet has significantly propelled crowdfunding by providing platforms for projects to share their stories and secure donations or investments efficiently.
What this video covers
What is crowdfunding? Crowdfunding essentially is when you have a pool of individuals coming in to contribute collectively a certain amount of money. That could either be done in exchange of a product or in exchange of shares in a company where they are putting the money in.
In terms of what’s new around crowdfunding. Crowdfunding has been developed with the booming of the internet. Before, it was very hard to get a collective group of individuals at this level of volume or speed, and now, the internet has allowed for these types of programs, initiatives, or projects to launch themselves, put up their story, and get those donations or get those investments from a big pool of individuals.
We’re going to have different types of crowdfunding platforms. The first one is the donation-based crowdfunding. That’s a collective group of people giving money and not expecting anything in exchange. That also happens when you’re getting a t-shirt or selling a story that is compelling, that is inspiring people.
Then the other one that you’re going to have is the equity or the debt, which is where you’re getting investors in, and you’re giving them a piece of the equity in the business. In this case, you’re going to have great platforms like StartEngine! Or you’re going to have SeedInvest where you’re putting up your project, you’re putting up your offering with the offering documents, and people are coming in, they’re giving the money, and then you are giving them shares in the business.
Why crowdfund your startup? If you’re selling something tangible, I think crowdfunding is a great way to start getting those sales in. It’s also a great way to get PR, to get exposure, and to get the word out. I think, for example, if you’re more a technology startup or something that is not as tangible, maybe offering a beta test or giving a t-shirt in exchange is not going to be as compelling, so I think at that point, you may want to take a look more at the equity or debt-based type of crowdfunding. But if you’re around donations, and you have something tangible, it’s a great way to get those sales in.
In terms of where crowdfunding belongs in your plan, this should be used in the very early stages. That’s either you are ready to go for friends and family, or you’re ready to go for a seed round of financing, but it needs to happen in the early stages.
You could be a bigger company, for example, and you want to seek validation on certain lines of products that you’re launching, but typically, crowdfunding is used and works very well when the company is in the very early stages. Maybe it could be in the first year or the first couple of years, but you are getting things in motion. You’re getting up and running.
Once it’s picking up some momentum, you’re getting that layer of social to form so that the third-degree of connections, meaning those people inside of that community are going to jump in also. That’s why you want to make sure you go to a platform where you’re going to be seeking or seeing some of those people who are going to be more inclined to invest or contribute to your project. You want to first make sure that’s the right type of audience.
The next thing is, you want to understand whether there is enough of a community in there that it justifies the time you’re going to be allocating.
In terms of crowdfunding versus other startup fundraising channels, my take is that if you’re going after the donation-based crowdfunding, I think it’s great to validate and verify what you’re doing, but I think you’ve got to be very careful if you’re going out for investments because right now, the community of investors are seeing specifically the sophisticated like venture capital firms and angel investors.
