By Marc Walambe
Private equity is no longer limited to multimillion dollar deals and paybacks. Donation crowd funding is venture capital based on goodwill.
Investor ROI is based on social equity, instead of interest payments. You’re also spared time and frustration from applying for different business loans with common rejection.
Here’s an overview of donation crowd funding (DCF) and best practices for effective results:
Smaller Capital Needs: You can raise a thousand bucks to buy equipment to millions of dollars for high tech startups. Investors are less risk averse as most donations are small, $25-50, or so.
Best Practice: Response to more mundane needs may take time. Be sure to allow sufficient time based on the amount and purpose. Don’t expect to raise $10,000 for a new pizza oven in a couple of days.
Easy Qualifying: Basic criteria will be verified, such as your business exists, etc. DCF typically does not check credit or income. Conversely, private crowd funding will likely check these factors.
Best Practices: Please remember, crowd funding investors want to help! Focus on how the funds will help your business. Avoid sulking and tales of woe.
Even social investors avoid what appears to be a lost cause. For instance, how money allows you to start a restaurant is preferred to complaints about stingy banks.
Broad Exposure: There are many crowd funding platforms with countless visitors.
Best Practices: Leverage the unique aspects of different sites. Some platforms tailor more to particular needs or social causes.
As an example, Executive Producer Elliott Broidy turned to Indiegogo for feeding homeless youth this past summer.
Non-Financial Repayment: Instead of loan interest, you can repay investors with free products, services or certificates of appreciation. (I’m serious!) Small shares of ownership may be appropriate for certain cases.
Best Practices: Make sure to follow through on repayment, no matter how small. Otherwise, the broad exposure may turn against you. Investors will use social media or complain to the site, which results in low ratings. You will then have more difficulty raising funds in the future.
Cater your repayment to the situation. A high tech innovation may offer 1 share of ownership in exchange for contributions of $x dollars or more. Charities can offer ‘thank you’ plaques or other recognition.
Focus on your story rather than the repayment. Investors should really want to help you with repayment as a bonus.
Crowd Funding Strategies: There are savvy ways to use crowd funding beyond the obvious of raising money.
Below are some strategies to consider:
Branding: Setting your landscaping or dry cleaning apart from the herd can take time. However, small business owners may not have the capital and time to distinguish themselves.
Niche products have loyal demand and higher profit margins. However, targeting consumers for tattoo cream or DIY boil lancing is difficult.
How do we know if people are interested in lancing their own boils? This market research is beyond the time and budget of many entrepreneurs.
How crowd funding helps: You can tell a unique story with minimal time and cost. Examples: Why your coffee shop fills the need for a gathering place in the community. How your gluten free baking products offer parents peace of mind.
Proof of Concept (POC): Customer pre-orders raise capital before production has started. However, you must first show why a product or service has real world value. This mostly applies to innovative products and inventions.
Facebook and Twitter are POC examples that had to show practical value before coming to market.
How crowd funding helps: With crowd funding, you state a case for why the product or service has practical value. Example: Your new mobile app offers custom Prancercise workouts and here’s why it’s important.
Based on the response, you get a sense for how valid an idea or product is.
Validate Product Demand: Gauging demand is made easier with crowd funding.
Offering two options for repayment is a way to validate demand. If more people want a ‘thank you’ note instead of your nose mitten, the product strategy needs tweaking.
More than a Low Cost Source of Capital: Growth in DCF continues unabated. Entrepreneurs can leverage the convenience and low cost of crowd funding in many ways. Will you use crowd funding in the future?
Marc Walambe has over 13 years of experience in global asset management. He has held positions at ING Mutual Funds and the Capital Markets Division of First Tennessee Bank.