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ARTICLE PaymentsJune 24, 2014

How to fund a new business using crowdfunding

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Crowdfunding is one way to gauge interest in and raise funds for a new business idea. Here, we look at how it works, the different platforms available and how start-ups can boost their crowdfunding efforts.

New business ventures come with an element of risk. All entrepreneurs grapple with questions about whether people will actually want to buy their product or service and how they will fund their brilliant new idea.

Crowdfunding is one way for business start-ups and creative projects to remove much of that risk.

What is crowdfunding?

Crowdfunding is a way for start-ups to gauge public interest in their product and gather the funding required for product development from the online community. This is facilitated through various crowdfunding platforms, which allow online users to support new businesses or projects by pledging cash or buying products and services.

To get a crowdfunding initiative underway, start-ups need a genuine project, monetary target, crowdfunding platform host and the ability to drum up financial support.

Crowdfunding platforms generally take a 5 per cent cut of the total funds raised, as well as transaction costs. They work on an “all or nothing” basis – projects must reach their target to receive the funds.

Equity and reward-based crowdfunding

There are two main types of crowdfunding – equity-based and reward-based.

Equity-based crowdfunding provides investors with equity in a business in exchange for financial investment. This is best suited to established small and medium businesses that can demonstrate strong business growth. Equity-based crowdfunding is popular in Europe but less common in Australia, where regulations currently restrict companies from raising more than $2 million outside of public markets or transferring equity to more than 20 people in any given year.

Reward-based crowdfunding is more suited to start-ups. This offers a means to raise funds to get projects off the ground in exchange for non-financial rewards or pre-selling of products.

Does crowdfunding really work?

Many start-ups and projects have got off to a flying start thanks to crowdfunding, but success is certainly not guaranteed.

 

One of the most successful crowdfunding projects is the Pebble smartwatch , which connects to Android and iPhone via Bluetooth. It raised almost US$10 million in less than 30 days by pre-selling on the Kickstarter crowdfunding platform. Its target was only US$100,000.

In Australia, the Spielgaben educational toy was also a crowdfunding success, raising $163,534 on the Indiegogo platform.

Not all crowdfunding projects, however, reach their goals. The New York City Opera , for example, attempted to raise US$1 million though a 22-day Kickstarter campaign but raised little over $300,000.

Set goals and timeframes

Once a venture has chosen a crowdfunding platform, it must set a funding goal and a timeframe of up to 60 days in which to raise the funds. “We recommend a 30-day campaign, because it’s quite a labour-intensive process,” says Alan Crabbe, co-founder of Australian crowdfunding platform Pozible. “If you’re well prepared, you should be able to reach your audience quickly.”

When pitching a project, it helps to declare how the money raised will be spent. For instance, you could specify that it will go towards getting a product made or designing and printing its labels.

Using social media and video

A successful crowdfunding campaign relies on widespread public support, so it is vital that you spread the word from the get-go.

“You need to get early momentum for a project to build trust and credibility,” says Crabbe. “Our advice is to have an already engaged audience that you can target as soon as you launch a campaign. We tend to see the projects that get to 30 per cent of their target early on are 95 per cent more likely to succeed in reaching their target at the end.”

Social media is one of the most effective ways to build awareness and support for a crowdfunding project. “People will support you to get something off the ground if they know who you are, so tell your story and the story behind the project,” advises Crabbe.

He adds that pitch videos also go a long way in building public engagement. “A pitch video is crucial – you’re more likely to be successful and are likely to raise two to three times more with a video than without one,” says Crabbe.

Three crowdfunding platforms to try

1) Pozible
Pozible is the largest crowdfunding platform in the Asia-Pacific region. It has received more than AU$22 million in pledges and has a 56 per cent success rate. Any form of legal project is acceptable and many of its projects are within creative industries, such as music and film.

2) Kickstarter
Brooklyn-based Kickstarter recently opened its (virtual) doors in Australia. Since launching in 2009, it has received more than US$1 billion in pledges and has funded almost 60,000 projects. Kickstarter is a platform for creative projects in areas such as technology, photography, fashion and design.

3) SproutBack
Australian crowdfunding platform SproutBack launched in January 2014. It hosts a wide range of projects and also offers users access to Australian mentors from fields such as manufacturing, food and fashion.

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