How Crowdfunding Is Changing The Way Startups Do Business


Crowdfunding, the process of getting small investments from a number of small investors, who are often eventual customers, has dramatically changed the world of startups. Instead of just a few paths to business ownership, all of which favor established businesses and creators, crowdfunding has opened the doors to all kinds of projects and creators who traditionally have struggled to get noticed. Wondering how crowdfunding is changing the way startups do business?

Marginalized Creators

Women receive only 7% of all capital funding for startups, and continue to struggle to get approval for business loans from traditional banks. For those who are disabled, veterans, or are people of color, the process can be even more difficult. Studies have even shown that when the exact same sales pitch is delivered by a man and a woman, the man is likely to get funding, while the woman is not.

Many of these factors are either minimized or eliminated by crowdfunding. On crowdfunding sites, the focus is on the product and the business plan, not the creator themselves. This allows the product to stand on its own and bypass the inherent and cultural biases of the audience.

While this won’t ultimately solve the problem of the pervasive whiteness and maleness of the entrepreneurial crowd, it does start the process of showing that women, people of color, and those who are multiply marginalized are just as capable of running a successful business as a white man.

Niche Products and Services

To create successful products, companies often had to create items that were accessible for a very large base. Niche products were unlikely to be able to connect with enough customers to make them worthwhile. With crowdfunding driven by social media, that’s just not the case anymore.

If a creator uses hashtags, connects with blogs, gets featured in the right places, and generally access their audience well, it’s very likely that they’ll be able to get the money from crowdfunding campaigns they need to make the product their audience wants. It’s also easier to make a product that has a narrowly targeted focus. Many creators of items like comic books can crowdsource funding for each issue, then reward backers with issues of the comic, for example.

Convincing one of the big comic book creators to pick up a book is very difficult, and even indie comic companies are very competitive. If all you need to do is reach an audience of 50 or 100 people, however, you may have a much easier time creating your product.

Ability to Relocate

Many companies struggle with knowing whether or not their offices are the right size, in the right location, and more. While some brick-and-mortar stores have absolutely crowdfunded the capital to, for example, turn a catering business into a full scale restaurant, many crowdfunding companies are online. This means that they have a more distinct ability to relocate than other businesses.

After all, if you have a handful of staff and your customers don’t come to your store, moving is significantly less involved than if you’re a retail location with tons of foot traffic.

Companies that do need to relocate, on the other hand, could look at crowdfunding their moving costs, especially if they’re hearing a lot of buzz from customers that they should relocate or be in a more accessible area. In fact, moving to a new location means making new friends and clients.

Direct Connections

Ultimately, one of the biggest benefits of crowdfunding is also one of the biggest benefits of social media – and potentially one of the biggest vulnerabilities. With crowdfunding, companies have the ability to connect directly with their customers. They don’t need to go through board rooms or big wig venture capitalists. They work directly with the fans and supporters of their concepts and ideas. This can give them the opportunity to make incredibly personal connections that support their business for years to come.

But companies also need to be careful with these customer connections. Businesses are often told to create and maintain social media profiles, and they generally should. Businesses also need to make sure that they’re presenting a work appropriate persona online. A crowdfunding campaign could be sunk if the CEO continually upsets people on social media, or seems unable to represent the business well. Even old posts that date back to before the campaign began could potentially be negatively interpreted.

Companies that use crowdfunding to source either startup capital or expansion capital have the opportunity to do something new and exciting. Just like any big opportunity, it’s important that they proceed with caution. Just because it’s easy to set up a crowdfunding campaign doesn’t mean that a business should dive into it without making sure that they’re doing it right.

Image via Shutterstock

About the Author

Sam Davtyan

Co-founder and marketing director of Digital Media Group, a full-time digital marketing agency with headquarters in Salt Lake City, Utah and Yerevan, Armenia. Helping startups and small businesses increase their search visibility and rankings in search results.

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