In recent years, crowdfunding has become a viable way to raise the capital needed to launch new businesses and products. More and more companies are shunning the traditional methods to starting up in favour of this more novel approach, with plenty of dedicated websites available to those who are looking to utilise crowdfunding as part of their business strategy.
Engineering is one of many sectors jumping on the crowdfunding bandwagon. As an industry that endures much higher overheads than some of its counterparts, it can be difficult for many fledgling or expanding companies to scrape together the cash needed to buy new machinery, or move into larger premises. So what options are available to those who are considering crowdfunding for the first time?
What is crowdfunding?
Crowdfunding is a means of raising capital through contributions from the community at large – typically these are small, but come from a high number of people.
Whereas startups have previously relied on business loans and conventional investment to get up and running, crowdfunding is shaping this process to become much more peer-centric, allowing companies to evaluate the interest in their offering prior to official launch. Many businesses (including those that have failed to win over the likes of banks) are given a second chance of investment from the general public thanks to crowdfunding.
Is crowdfunding a ‘one size fits all’?
Simply put – no. There are lots of different subgenres that fall under the crowdfunding umbrella and it’s important to identify the method that has the best alignment with your objective.
The four main types are as follows:
- Reward-based crowdfunding: This is where companies offer backers different tiers of rewards based on how much they donate. This can be anything from a simple thank you for smaller pledges, right up to exclusive event tickets for significant contributions. Reward-based crowdfunding tends to be one of the most popular methods for businesses and once the rewards have been fulfilled, there is no expectation to repay the funds raised.
- Equity-based crowdfunding: If you’re prepared to relinquish a share in your business in order to raise the cash you need, then you might want to consider equity-based crowdfunding. For instance, a company worth £100,000 might offer the community a 10% share in the business to raise £10,000. Therefore, contributions of £1000 would afford backers a 1% share; £5000 would get them 5% and so forth.
- Peer-to-peer lending: Unlike reward-based crowdfunding, businesses have to repay backers – with interest – under the peer-to-peer lending method. In this way it works in a similar manner to a business loan, although the source of investment is the community as opposed to a bank. This is a regulated process and companies must pass the necessary credit checks in order to qualify for peer-to-peer lending.
- Donation-based crowdfunding: Crowdfunding that is purely via donation only is usually reserved for charities, not-for-profit organisations and humanitarian causes. Backers will usually expect something in return for their contribution, which makes this method largely unsuitable for a majority of businesses.
What are the benefits?
Crowdfunding is a great way of assessing the market and the interest levels surrounding your product or service. It increases your chances of success, as those who have contributed are already likely to place an order with you once you’re up and running.
With that in mind, the ability to market your company/product to your target audience prior to any official launch is invaluable and certainly not afforded by the more conventional routes. You may also be given useful feedback that allows you to tailor your offering in a way that suits the majority – think of it as a focus group that also finances your project if they like what they see.
With the right amount of preparation, crowdfunding can also produce results faster than dealing with the likes of traditional investors. There is also little to no upfront financial outlay involved, which is attractive to companies that are yet to build their customer base.
Are there any disadvantages?
Those within the engineering sector should be particularly mindful of crowdfunding a project that is not currently patented. Whilst the exposure can work wonders for brand awareness, there is also nothing to stop unscrupulous characters from stealing your ideas if you have not taken the steps necessary to prevent this from happening.
The public nature of crowdfunding can also mean that the reputation of a company is in the firing line if the project fails. Crowdfunding is very much a double-edged sword when it comes to PR, with the ability to make or break a business based on the outcome of the campaign. Therefore, it’s important to put in the groundwork needed to give your project the best possible chance of succeeding.
Companies that are planning to crowdfund a project should be prepared for the level of work and commitment involved. Significant preparation is required in order to raise awareness and interest in your campaign, which means unbridled devotion of time and resources to your cause. Crowdfunding is not a quick fix and there is absolutely no guarantee of a project meeting its objectives – even less so if strategy is lacking from the offset.
Where should I go to crowdfund my engineering project?
There are plenty of websites available to companies that are looking to start a crowdfunding campaign – many of which focus on a specific medium, as well as varying target audiences and different business niches.
Check out the likes of Kickstarter, Indiegogo, RocketHub, Funding Circle, Crowdcube and Crowdfunder for inspiration and be sure to shop around for the site that offers the best alignment with your project.
Have you ever used crowdfunding to raise capital? What are your experiences? Tell us about it by leaving a comment below!