Creating steady and guaranteed income through SME crowdfunding platforms

As I am sure you can imagine, as you are reading this article, one of the major difficulties for small and medium enterprises (SME) is funding. No matter if you are just launching as a company or try to fund certain projects or product launches. When banks are not an option, either because of your company ethos or credit history, crowdfunding platforms come into play.

What is crowdfunding?

Throughout Europe, according to a
study done by the European Commission Financial Services User Group, shows an
increase in crowdfunding popularity. They show that countries such as Germany
and the UK are using the internet to search for more and more crowdfunding
platforms. This increase in popularity would suggest that these platforms are
gaining more and more success.

But that still leaves the question, what is crowdfunding?

In a nutshell, crowdfunding is asking
investors, often members of the public to invest in your business. It a great
way to gather funds from a large number of people for any number of reasons.
You can use these platforms for the expansion of your company, to fund a
certain project or help the launch of a new product. Some enterprises even fall
on crowdfunding to help when times are hard.

Types of crowdfunding
platforms

Before you can begin to make any
steady and guaranteed income off crowdfunding, you need to know which the right
type for you is. There are four main types:

  • Donation based: Where investors donate funds and expect nothing in return. Normally suited for charity or events within a community.
  • Reward based: Investors donate with the expectations of a reward relative to their donation. This works very well with product launches.
  • Equity based: Investors receive a share of your company. Ideal for ambitious growing companies with solid plans.
  • Debt based: The closest to working with a bank. Investors lend your company money and receive interest back. These are best suited for well-established companies with a solid credit history.

All of these types have their own
benefits and risks, so it is important that you research and find out which
best suits the ambitions of your company. And also fits around your reasons for
starting crowdfunding in the first place.

Our platform is a debt-based platform
that focuses on investors. Giving investors a list of potential companies to
invest in. Future articles will clearly reflect this and will provide investors
with valuable information.

Risks and Benefits of Crowdfunding
(General)

The European Commission has a long
list of risks and benefits that can be found when crowdfunding. These are
mostly seen from the perspective of an investor, so if you can offer security
against these risks, it will help you avoid them and thus, gain a steady income
from crowdfunding.

–          What is referred to as “wisdom of the
crowd”.  This allows you to spread the
risk over a number of people, with potentially high rewards.

–          Project risk. This relates to any
early-stage project or company, as they have the highest risk of failure.

–          Asymmetric information. This
generally means that the information given to the investor about the risks and
returns of their investments are not entirely clear.

–          Opposing selection. This refers to
the difference between high-quality projects and low-quality ones. High-quality
projects or companies may want to avoid crowdfunding and stay with traditional
investors, leaving low-quality on crowdfunding platforms.

–          Moral Hazard. Investors face the risk
of their money not being used for its designated purpose, this is the meaning
of moral risk.

–          Liquidity risk. This relates to
investors not being able to back out before reaching completion. It is a fear
of investors to not be able to retreat if they don’t see the fruits of their
investment.

–          Platform failure risks. The most
successful platforms, that are the ones with most projects or companies, are
the ones most likely to attract investors. Thus, making them more attractive to
borrowers because there are more investors. This could lead to smaller markets
ceasing to exist. It can be avoided by investors using smaller platforms or
platforms being very much differentiated horizontally.

–          Other risks. Other risks are
insufficient funds being raised, fraud, cyber-attacks and disproportionate
shares.

–          Investor risk awareness. This relates
to the experience an investor might have or not have. If they feel there are
too many risks, they are more unlikely to invest.

–          Platform measures to counteract on
risks. Worry not, many platforms have ways to help prevent these risks. And
other measures to help if any of the risks do happen.

Steps to a successful crowdfunding
campaign

Organizing a successful crowdfunding
campaign is not easy. Many platforms will help you with a lot of what needs to
be done, but there are some important aspects that you or your company need to
check in order to be truly successful.

1.    Crunch the numbers. Make sure
you know how much you need, be clear on what you can give back to investors and
how valuable is your business. Each campaign will require different numbers, so
it is important to have them straight.

2.    Have a clear timeframe. Allow
time for preparation, for the duration of the campaign and after for the funds
to be cleared. It is also important to consider how long the project will take.

3.    Have a good story. The
numbers might be the best they possibly can be, but without a heartfelt story,
you are unlikely to get investors.

4.    Prepare everything. Make sure
you have all the media you will need, the pitch, everything you think you will
need. Checking past campaigns to see what they used is not a bad idea.

5.    Hype. It is never too early
to start building hype towards your crowdfunding campaign.

6.    Keep people up to date. No
matter at what stage of the process you are, keep people updated on any
progress, information or little news snippets.

7.    Be realistic. This is about
your rewards, about how much you are aiming to achieve, about the project as a
whole. Being ambitious is not a bad thing, but it is always best to be
realistic.

Examples

There have been many successful
crowdfunding campaigns on many platforms. Here are just a few.

Superhot. Using a rewards based type on Kickstarter this videogame was able to raise $250,000 while letting
people who invested help design their own level.

BrewDog. This is probably the most famous company to use crowdfunding,
because of their “anti-business” ethos. They opened it up to the general public
using an equity based crowdfunding and more than 1,300 people signed up.

The Micklegate Run community event. Using a donation based crowdfunding,
this small town was able to raise over £10k to turn the streets of a York into
a soap-box racetrack packed with people cheering on.

Hans Fex. Hans Fex raised over $1.2 million to fund a small collection
of unusual items. He used a debt-based crowdfunding model and found over 5,000
investors. His rare collection, which was all labeled, included: moon rock,
dinosaur eggshell and mummy wrap.

Final thoughts

As
this article shows, it is more than possible to make a steady income with a
successful crowdfunding campaign. No matter if you are an investor or a
company, crowdfunding works, as the examples prove, and they are a good way to
find funds.

Always
make sure you do your research before investing in any company and be sure you
know all the risks, aims and objectives of the campaign.

https://efp.brewdog.com/equityforpunks

https://blog.rotacloud.com/crowfunding-guide-smes/

https://ec.europa.eu/info/sites/info/files/file_import/160503-study-crowdfunding-investor-perspective_en_0.pdf

https://www.ulster.ac.uk/__data/assets/pdf_file/0009/168417/crowdfunding.pdf

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