Is the traditional crowdfunding model broken?

Clear Books CEO Tim Fouracre spells out why he thinks B2B small businesses should look beyond established crowdfunding platforms and consider the DIY route instead…

2014 has been heralded as the year for crowdfunding. There are literally hundreds of different platforms for people to choose from ranging from the likes of Seedrs and Platform Black to Kickstarter and Indiegogo, but with equity-based crowdfunding on the rise, consumers and small businesses are faced with a difficult choice.

Traditional crowdfunding platforms have huge user bases, tailored for product-based startups, which mean that if you are lucky enough to make it onto the ‘popular’ feed, your business idea will be viewed by millions. If, on the other hand, you don’t instantly capture the imagination of would-be investors your chances of getting funded through these types of crowdfunding sites tends to decrease significantly.

While traditional crowdfunding platforms with product-based models might be good for getting consumer-focused propositions backed, they are less effective when it comes to business to business (B2B) companies, which may have products and services that are less appealing to the traditional crowdfunding investor.

Crowdfunding: Don’t give your money away

The biggest issue with well-established crowdfunding sites is the high commission demanded, (typically between 5 and 10%). Bootstrapped start-ups need all the financial help they can get and this is one of the many reasons small businesses are increasingly choosing to go it alone with Do It Yourself (DIY) crowdfunding; creating and running your funding campaign through your own website.

Know your investors

One of the greatest benefits of DIY crowdfunding is the information businesses receive about their backers. Where traditional crowdfunding focuses on getting the money through the door, you won’t know necessarily why or where your product or service adds value to those people.

By setting up your own crowdfunding site, that market research data is more readily accessible. Moreover, it enables the business to constantly better itself and innovate based on the customer’s, business’ or investor’s feedback.

When crowdfunding success also means disaster

One of the biggest problems with most crowdfunding platforms that has recently been damaging start-up businesses is being over-funded. Although some of the most recently built sites like Crowdcube allow you to trade in shares; the equity-based model, traditional reward-based crowdfunding platforms do not. This means that businesses opt to give something else away in return for investment; usually the product itself.

This isn’t often an issue for most businesses because the funding provides the opportunity to scale production. However when campaigns are grossly over-funded, this can cause problems with meeting the demand for products in exchange for funding, rather than focusing on ‘paying’ clients.

Examples of this can be found all over traditional crowdfunding platforms and can cause massive delays for the business. While some may view this as a justifiable sacrifice, there are risks involved with this that can impact on the potential of the business’ future. You can spend so long fulfilling those owed orders; you’ll never have time to fulfil any new ones.

If not broken, is the crowdfunding model breaking?

The huge user bases of popular crowdfunding platforms still make them a very attractive option. That said, as fewer start-ups are willing to give up such a large percentage of their funding in commission it isn’t difficult to see a future in which start-ups primarily use their own platforms for serious funding.

In-house developers within tech start-ups make creating self-funding platforms a realistic proposition, particularly if it provides flexibility and information as well as funding. These DIY crowdfunding platforms also provide the consumer with a much more interesting investment opportunity; not only being able to buy the product, but also buy shares in it.

Perhaps the crowdfunding model isn’t broken just yet, but with more and more small businesses creating self-funding platforms to crowdsource more serious investment, it can certainly be argued that the writing may be on the wall; especially in the B2B space.

Clear Books offers online accountancy software for businesses. It is currently raising £3.3m through self-crowdfunding. 

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