Crowdfunding's added value continued...
Modern crowdfunding has received many plaudits for how it has taken an age old way of raising funds online and made it easier and more cost-effective to reach large numbers of potential backers. However, crowdfunding can add value in other ways too. This the second of two blogs on this topic (read the first blog here).
The direct connection between backers and the projects that they are motivated to see succeed makes it a better deal for everybody.
The option created by crowdfunding to access funders that have an interest, beyond financial, in seeing a project succeed can offer entrepreneurs the opportunity to receive finance on better terms than they would from purely commercially-focused funders. This non-financial motivation can be due to a number of factors. For example, the project may be delivering a social benefit that the funder wishes to support, the project may be developing a product the funder likes or the entrepreneur themselves may be in some way connected to the funder.
The reward model as an alternative to getting a loan or investment from a traditional lender offers the opportunity to give funders low-cost or no-cost perks instead of having to pay the money back or give up some ownership of the business or project. This illustrated by how Chris Riley raised $6,000 to make his documentary 'First Orbit' about Yuri Gagarin's space flight offering producer credits and copies of the film as rewards. Had he borrowed from the bank he initially approached he would have had to repay the $3,200 minimum he needed as well as interest at a staggering 24%.
Even if using crowdfunding to borrow or attract equity investment, the model can offer better terms than the traditional sources. One example of this is the New Leaf Co-op in Edinburgh which borrowed £3,340 from a community of funders that were would-be customers and had a strong desire to see the plans for the co-op become a reality. Lenders were therefore willing to accept discounts and vouchers in the shop as an alternative to an interest rate. Another is how the Thoughtful Bread Company, when they were looking to expand their business from a local market stall to their own shop, turned to their local community to crowd fund £55,000 in return for 20% shares in the company, via equity crowdfunding platform Crowdcube.
"Instead of turning to one Dragons' Den-style investor, I thought we should turn to the community that has supported us in the last four years. We've had a following of people who have been asking for a bread shop and now this is their chance to help us achieve that." Duncan Glendinning, founder, the Thoughtful Bread Company
This builds on to lessons from research, which shows that there are three motivations that incentivise people to back crowdfunding campaigns:
- A feeling of being at least partly responsible for the success of others' initiatives (desire for patronage)
- Striving to be part of a communal social initiative (desire for social participation),
- Seeking a payoff from monetary contributions (desire for investment)
Tapping into different levels of engagement
Because backers often engage with crowdfunding campaigns out of a personal interest in making a specific product or project a reality, it creates new opportunities to create more valuable products and experiences for backers while at the same time giving entrepreneurs a better deal on finance. The tiered reward system allows entrepreneurs to make the most of this dynamic, by tapping into all levels of engagement, from the person who is willing to. When the team behind Lynch Tree, a Kickstarter campaign to raise funds for a documentary about film director David Lynch, they offered their backers who were typically David Lynch fans rewards that were unique for the campaign from an art portrait photo of David Lynch for a $10 pledge to Executive Producer credits for the film and passes to international festivals where the film would be shown for a $5000 pledge.
Getting more than money
While it is first and foremost about raising money for projects, crowdfunding also increases the potential to add further value to the development of projects by allowing entrepreneurs to access more than money from backers either through their advice on product development or through getting volunteering hours from backers. If funding the early stages of development the crowd can help iterate what the project is hoping to do and assist in delivering something that more closely matches the needs of its customers. The added app functionality and offer for couples of Alpha strapless, is one example of backers influencing products.
In addition to advice some platforms and campaigns also facilitate the giving of time and resources in support of particular projects. In some cases this can be on an ad hoc request basis as the project proceeds or in others projects can set out up front the type of assistance they would find useful. Platforms such as Peoplefund.it and Buzzbnk commonly feature projects seeking blended contributions of money and assistance. A diverse crowd can be a rich source of expertise and skills should people be willing to contribute more than money. The New Leaf Co-op, made the most of this opportunity and successfully included in their campaign the request for people to come help them set up and fit their shop.