In a new study, it was revealed that using words like “novel” and “useful” in your business plan will attract lower funding than if you just used only “novel” or “useful”.
According to this research, though crowdfunding platforms are perceived to be innovative and dynamic, they are not nearly as forward-thinking as they preach. In fact, most investors are more comfortable putting their money into ideas that have worked in the past. As a result, people with truly novel concepts are reluctant to seek funding from crowd-investors.
In 2016, capital from crowdfunding surpassed that of venture capitalists for the first time, and it is believed to reach $93 billion globally by 2025. Perhaps, crowdfunding’s biggest advantage over venture capitalists is its speed of enterprise funding.
While VC’s take years to conclude a deal, crowdfunding platforms can raise the same amount in a few months. Because of this, many entrepreneurs are using crowdfunding platforms to raise their “seed money”, but at what cost? Innovation and bold concepts?
How crowdfunding dampens innovation
Crowdfunding may increase the availability of financial sources, but this does not exempt it from requiring the same level of effort as venture capital or just kickstarting the business. Ideally, it can take you a couple of years or so to pitch an idea to potential investors without knowing how much they are willing to contribute.
Launching a crowdfunding campaign to raise money is far from being guaranteed. Experienced investors are very cautious about chucking money into a crowdfunding site. This is because a growing wave of overvalued, yet unreliable investment projects have found their way into many crowdfunding websites.
Many investors have lost several thousands of pounds (millions in some cases) to these hyped ventures. This has led to the trend of “picky investors”. They would rather put their money in “familiar” projects rather than so-called novel products.
Not wanting to be disappointed, many entrepreneurs looking to raise funds on crowdfunding platforms are opting for the safer alternative. In the end, innovation is the main casualty.
The way forward for entrepreneurs
Based on the research mentioned previously, the lead researcher, Dr. Ping Xiao, advises entrepreneurs to word their project as either “novel” or “useful” but never both. This knowledge does debunk the belief that crowdfunding spurs and supports innovation and creativity.
As entrepreneurs, you can use smart resources to maintain your finances, however, if you must raise money by crowdfunding, avoid revealing too much information. Less is more. Give prospective investors enough to be interested, but less so they don’t become overwhelmed. The following tips should guide you towards launching a successful crowdfunding campaign:
- Start the crowdfunding campaign before your product goes live
- Focus your campaign on a niche audience
- Research the crowdfunding site and type of investors thoroughly
- Invest in a professional and creative video
- Don’t be too greedy with your financial goal
- Tell a beautiful story behind the “why” of your product
- Take advantage of social media
- Establish strong donor relations; it is important
Crowdfunding can provide a viable business option for SME owners, but it requires a lot of work and the average campaign generates £10,000. Ensure you use a suitable crowdfunding site to avoid wasting time and resources.