Crowdfunding Options for Business

Crowdfunding is one of the many alternative finance options for businesses now available on the market, making the traditional bank loan route less and less necessary. Here we’ll run through the types of crowdfunding available to businesses needing an injection of cash.

What is Crowdfunding?

Usually the crowd buys shares in your company, donates cash to a good cause, or gets rewarded with a product in return. The crowd is by its nature diverse, meaning individuals have many different reasons why they might support you. This means the money is often better than traditional investment because there are extra benefits available to funders.

Raising funds this way isn’t easy and it’s very public. But it’s becoming more and more popular.

“Crowdfunding is a way of raising money by asking a lot of people (the crowd) to each provide a small part of the total you need.”

– Tim Wright, Founder at TwinTangibles and author of the Scottish Crowdfunding Report

When to Use Crowdfunding

There are three main types of crowdfunding:

Equity

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With equity crowdfunding, funders receive shares in exchange for capital. You could opt for equity crowdfunding if you’re willing to fork over a stake in your business in exchange for cash. This means you don’t have to offer up any assets, but the downside is that your funders will be able to assert potentially a lot of influence over your business. However if you’re looking for guidance from seasoned investors, this could be a good option.

Pros

  • No collateral required
  • Ability to raise money quickly without having to agree fundraising commitments
  • No debt component
  • No credit check required

Cons

  • B2B companies will find this harder than B2C companies
  • You won’t get the business advice that comes with more traditional routes
  • You’ll need to make room for a high level of transparency
  • Giving away bits of your business could be a problem if investors decide to assert influence on company operations
  • You will need an accountant to help you navigate the funding
  • Fees are charged by the funding platform

Reward-based
With reward-based crowdfunding, funders receive a reward or the product itself. This typically works best for companies with a physical product that they want to build and sell, and tends to be used more by B2C businesses.

Pros

  • No collateral required
  • Ability to raise money quickly without having to agree fundraising commitments
  • No need to give away equity
  • Free publicity
  • No need to deal with debt
  • Establishes a customer base
  • Validates your company and your product

Cons

  • It’s sometimes ‘all or nothing’
  • You won’t get the business advice that comes with more traditional routes
  • Your IP could be at risk and you may have your idea ripped off
  • B2B companies will find this harder than B2C companies
  • You will need an accountant to help you navigate the funding
  • Fees are charged by the funding platform
  • If you don’t deliver your product on time, things can go south. Check out the Coolest Cooler as an example of bad planning.

Donation-based
Donation-based crowdfunding is used by nonprofits, educational bodies and charities to raise funds. It has been a highly successful way to get grass-roots projects off the ground, or fundraising to help people in financial difficulty.

Pros

  • No collateral required
  • No requirement to give anything back to donors
  • Free publicity
  • No need to deal with debt

Cons

  • If you are a for-profit business, this model likely won’t work for you
  • You won’t get the business advice that comes with more traditional routes
  • You will need an accountant to help you navigate the funding
  • Fees are charged by the funding platform

According to our friends at ShareIn, a turnkey crowdfunding solution, “For Companies to be successful crowdfunding they need to understand that it is down to them to generate most of the crowd themselves. If you list on a platform and don’t bring the first 30% to 40% yourself you are very unlikely to succeed. Those initial investors will bring their connections. The percentage of total strangers who have no prior connect with your company investing are very low.”

There is one more type of funding that some refer to as ‘loan based crowdfunding’, or ‘peer to peer business lending’ that we feel deserves its own article, so watch this space!

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Case Study – Flow Hive

Flow Hive Crowdfunding

One example of a wildly successful reward-based crowdfunding campaign was a product from Stu and Cedar Anderson, an Australian father-son duo called Flow Hive. What does their product do? It aims to turn beekeeping on its head by adding a tap to beehives.

Their goal was to raise $70,000 USD on Indiegogo. It took them just 8 minutes to reach their target. And by the time the campaign closed, they had raised $12.2 million USD!

Although it really wasn’t that simple — it took the pair 10 years to find a way to get the honey to run out via a tap without disturbing the bees. Traditional beekeepers need to break open the hive and distress the bees to access the combs, brush off the bees, while decked out in full sting-protective gear that usually lets a few stings in. They would then need to transport the frames to a processing centre where the wax is removed, filter the honey and clean the frames, and finally transport the frames back to the hives. So, a massive hassle.

With the Flow Hive, Stu and Cedar have managed to take out all that faff. Their flow frame cell technology consists of already partly formed honey cells – the bees complete the comb with their wax and fill the cells with honey. Turning the handle means the patented ‘split cell technology’ creates channels inside the comb, enabling the honey to flow out of the hive, leaving the bees none the wiser.

Have a watch of their compelling video to find out the incredible way they have managed to bring nature under their command.

One of the reasons it was so successful was that there were many options to sponsor. You could choose from Flow Light – just a few Flow Frames, Flow Full – a full set of Flow Frames, or the complete Flow Hive – everything you need except the bees. Prices of these rewards ranged from $180-$600. You could also pledge $30 to receive a selection of postcards and have your name listed on the Valued Supporters page.

Of course this wildly popular campaign gathered a great deal of press attention, which contributed to its virality. Alongside that came the widely held desire to conserve the world’s population of honey bees, which the Flow Hive team champion.

Fast forward to 2016, and Flow Hive is still one of the top 10 most successful crowdfunding campaigns in history.

Are you looking to forecast when you might need a cash injection? Check out Float Cash Flow Forecasting!

Harriet Phimister

All about partnerships and marketing at Float Cash Flow Forecasting.