Want a quick infusion of cash and some invaluable social exposure? Then why aren’t you crowdfunding yet?
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It’s no secret that solopreneurs can have a hard time obtaining financing. While they have more options than ever in reaching customers through ecommerce and social marketing, one’s wallet is still the most popular way of getting seed capital. According to a 2020 survey by Guidant Financial, 37 percent of small business owners use personal cash to start a venture. Not surprisingly, their number-one challenge is lack of capital/cash flow.
The pandemic is also throwing a wrench into entrepreneurs’ funding plans. According to U.S. Chamber of Commerce, 26 percent of small businesses (SMBs) have asked customers for money or have set up crowdfunding websites. That might seem high, but consider that one in five SMBs said they’re two months or less from closing permanently because of the current recession. More than 100,000 SMBs have already gone bankrupt since the economy shut down, according to a recent survey from the National Bureau of Economic Research.
Let’s look at four key ways you can benefit from crowdfunding.
1. Conveniently get seed capital from supporters
SMBs have loan options from the federal government through the CARES Act, but for solopreneurs who are founding a startup in this economy, crowdfunding through Kickstarter or Indiegogo gives them another option.
The average small business requires $10,000 in startup capital, and one-third start with less than $5,000. Crowdfunding’s main benefit is obtaining seed capital, especially in uncertain market conditions. Secondly, it makes fundraising an easier process as entrepreneurs simply go online and educate supporters about the concept, business plan and product features prior to mass production. Many lenders and investors want a proven history of business success before financing a startup. That’s simply not possible for many solopreneurs.
2. Keep your ownership stake
When consumers and micro-investors see many individuals support a project, they become more inclined to open their checkbook and support you. But unlike venture capital, Kickstarter allows you to raise seed money and/or fund a prototype without giving up any ownership stake or equity shares. Without transfer of ownership, you retain maximum flexibility to design and manufacture features that best serve the needs of future buyers.
You don’t have to cave in to pressure from other shareholders who can disagree with a business plan down the road. When you keep 100 percent of your business, product or invention, you also leave room for future funding rounds that do require giving up some ownership stake. Finally, people like to back winning ideas and entrepreneurs, and Kickstarter campaigns bring the power of social proof. Innovative ideas that don’t currently exist in the marketplace can get free press coverage.
3. Get early feedback so you can optimize designs and features
It’s less risky when an entrepreneur knows he/she has a few hundred (or thousand) initial buyers prior to manufacturing a product. An entrepreneur doesn’t have to commit too much capital on inventory since there can be uncertainty about demand.
In the prototype stage, supporters will provide valuable feedback about the pros and cons of the product. Entrepreneurs must listen carefully about which features should be emphasized and which should be eliminated. Inability to listen could break your business. The voice of the customer should drive most, if not all, of design and manufacturing decisions. This early evaluation process can be a gauge of how successful your launch can be. Audience receptivity, even at this early stage, can validate your project.
4. Get free social exposure
Finally, most early supporters and investors will gladly promote and share your products and offers on social and mobile. So if you raised funds from 200 individuals, you’ll likely reach thousands of people when you launch the first product. This kind of social proof gives your startup much-needed credibility in a crowded marketplace.
Crowdfunding is often necessary because the recession has made it difficult for solopreneurs, gig workers and professionals to dip into personal savings for seed capital. When running a Kickstarter campaign, it’s best to publicize that you have a cofounder, as well as other members of the founding team who bring a unique skill set. Startups with two cofounders (compared to just one founder) raise 30 percent more capital, according to financial firm Fundera.
Financial backers should also give you extra motivation and energy to succeed. They have faith in you and believe in your plan. Thus, entrepreneurs must deliver backer rewards in a timely manner. You should also create a finished product that incorporates the customers’ feedback. Listening to the customer enables you to meet and exceed expectations.
- business plan
- CARES Act
- early stage
- Federal government
- Most Popular
- National Bureau of Economic Research
- press coverage
- small business