PIGGY has witnessed the growth of innovative and alternative financing methods such as crowdfunding.
This is an internet-based funding method for the realisation of an initiative through online distributed contributions and micro-sponsorships in the form of pledges of small monetary amounts by a large pool of people within a limited timeframe.
Funders can donate, pre-purchase the product, lend, or invest based on their belief in an appeal, the promise of its founder, and/or the expectation of a return.
Crowdfunding can be used to bring to life artistic projects, products for sale and personal ventures. It also aids entrepreneurs in gaining the wide exposure that will eventually help them to raise further funding.
For centuries, attracting outside capital to finance a project or entrepreneurial initiative has mostly depended on the conventional financiers such as banks, venture capitalists, government agencies and foundations.
However, it is well known that many new entrepreneurs around the world face difficulties in raising the funds needed to actualise their ideas through traditional fund providers, such as banks and venture capitalists. The crowdfunding approach, therefore, presents a different and attractive option for these entrepreneurs.
A good case-study is the funding of the Statue of Liberty in New York (USA). Originally proposed back in 1865 by Frenchman Edouard de Laoulaye, the sculpture was commissioned over 10 years later, in 1876.
It was decided that the Americans would be responsible for building the pedestal, and on the other side of the Atlantic, the French people would take care of the Statue and its assembly in the USA.
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A lack of funds posed a problem for Lady Liberty, and fundraising events were held in both countries. The American Committee of the Statue of Liberty raised some money but fell short of the necessary target.
Publisher Joseph Ptzeruli came to New York’s rescue. He successfully launched a fundraising campaign via his newspaper, The New York World. This was one of the first successful crowdfunding campaign on a large-scale basis. Crowdfunding has emerged as an increasingly popular and viable alternative way of funding a variety of initiatives.
Today, platforms such as Kickstarter and IndieGoGo have been built on the same concept and are providing an avenue for entrepreneurs all over the world to fund projects. There are several types of crowdfunding in practice, namely donation-based, equity-based, lending-based, and reward-based crowdfunding.
Reward-based crowdfunding?
Reward-based crowdfunding is a method that provides funders with a non-monetary return, such as one of the first manufactured products, new album, film, or game.
In this model, entrepreneurs invite potential customers to pre-order their product offering, sometimes at a lower-than-usual price. Founders may also offer gifts and other non-monetary rewards to their funders, but they never pay interest or a share of their business earnings.
This method has a medium level of risk for both the founder and funders.
The role of social media
Web portals, digital interactivity tools, and e-payment systems provided by a crowdfunding intermediary forms the novel bedrock for crowdfunding. Social media also plays an important role of spreading awareness for a crowdfunding campaign and attracting interest, further contributing to its chances of success.
To attract many funders, entrepreneurs should also build a network through social media. Studies have found that the early backers of a fundraising campaign are predominantly friends and family members.
Entrepreneurs need to establish the right crowd-based community as per their financial and operational needs. Social media engagement is also critical to the success of a crowd-funding campaign.
The use of visual media, such as videos, technical drawings, photographs, and even interactive chat forums is very popular in crowdfunding campaigns.
This communication pattern resonates well with the visual culture of the current digital age. In any given crowdfunding campaign, the effective application of these communication tools plays a critical role in conveying different aspects of the necessary information.
Overall, the following are the advantages of raising capital through crowd-funding campaigns:
Crowdfunding helps founders gauge public interest before launching new products or inadvertently spending millions on goods destined to collect dust in a warehouse;
Crowdfunding is effectively a cheap way to conduct market research;
Crowdfunding is very useful to reduce business risks;
Entrepreneurs do not give away any ownership or equity stake in the venture. Traditional sources of investment typically require that you give up a portion of a company or project in exchange for their support; and
Done properly, crowdfunding gives you not only the capital you need to start your business on a sound footing, but also an already-committed audience who have stuck through thick-and-thin with you from the very beginning.
For more insights, join a PiggyBankAdvisor WhatsApp Group (+263 78 358 4745).
- Matsika is the managing partner at Mark and Associates Consulting Group and founder of piggybankadvisor.com. — +263 78 358 4745 or batanai@markassociatescg.com/ batanai@piggybankadvisor.com.
