Crowdfunding for Entrepreneurs: Equity vs. Reward Crowdfunding

Businesses that wish to utilize equity crowdfunding must make sure they have good pitches when approaching investors, be able to offer an excellent return on investments and have a good business structure. “The best candidates for equity crowdfunding are businesses that are willing to give up a portion of their business,” explains Tania. Tommy Davis, president of Africa Business Angel Network, a group of private investors from Africa, offers further insights into what investors look for in a business. “They must be investor-worthy; you have to have a team that can identify potential in the market. They must also be investor ready, in other words have a plan, understand risks and identify a customer base that is sustainable,” says Davis.

If entrepreneurs are not interested in engaging in equity crowdfunding, Tania went on to explain the second type of crowdfunding, which is known as non-equity or reward crowdfunding. This type of funding refers to when a person makes a donation in exchange for a reward or gift, often related to the cause’ the person is donating to. This is the type of crowdfunding what Asanda Mali utilized and much like equity crowdfunding, it too has numerous benefits for entrepreneurs. The first benefit is that you do not pay your investors, instead you reward them with whatever you feel is appropriate. “The reward can literally be anything, that is what makes reward crowdfunding so interesting,” says Tania. Other benefits of reward crowdfunding include the fact that you do not need financial collateral and that it offers you the opportunity to validate your product with future customers.

Much like equity crowdfunding has its drawbacks, non-equity or reward crowdfunding has them too. Before engaging in this type of crowdfunding, entrepreneurs need to be aware of the following cons. The first is that if you do not at least raise your goal amount of money, you may not get any of the funds. “This is because they (crowdfunding platforms) do not want to want to fund too many poorly planned funding strategies,” says Tania. Other drawbacks include the fact that reward crowdfunding takes a lot of planning and effort and that most crowdfunding platforms charge a small closing fee once the campaign is over.

After explaining both the pros and cons to equity or reward crowdfunding, Tania then went on to explains its best candidates. The best candidates for this type of funding strategy are businesses with a great B2C product, businesses with a great business pitch, businesses who are looking to validate their business idea and non-profits. “This type of funding strategy really works when there is a cause or an extremely compelling story,” explains Tania.

Once Tania was finished explaining the two forms of crowdfunding in depth, she then went on to offer some suggestions to the entrepreneurs on what not to do when engaging in crowdfunding. The first is to not keep it a secret before it starts. “You want to communicate it with your clients, family and especially with influencers in order to create excitement. So you already have some guarantee that money will come through,” says Tania. Some other ‘what not to dos’ include not talking to your clients, having too many perks, not having any niche bloggers or press lined up, not securing any upfront pledges, launching too early or at the wrong time and not focusing on opt-in email addresses.

The class on funding strategies concluded with Tania offering her top 10 tips to use when utilizing crowdfunding. Number 1 is to show your passion through a compelling video. “People get roped into videos, they want to know who you are,” says Tania. Number 2 is to sell ‘why you want to do this’ before ‘who you are’. Number 3 is to assemble you’re A team. Number 4 is to realize that social media is not enough. Number 5 is to nurture your crowd so that they become your ambassadors throughout the campaign. Number 6 is to build traction for the campaign early. Number 7 is to recruit different people for different roles. Number 8 is to make sure every tier of rewards goes to a different customer enterprise. Number 9 is to never make any promises you cannot keep. And lastly, number 10 is to remember to measure your success from day 1.

 

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A South African girl who has a passion for informing and connecting others to information that aims to better the readers lives.