To understand crowdfunding and its potential, it is enough to know a few rules and some basic principles that are key to its operation: we gather them in this article by answering the crowdfunding FAQs around which there is still confusion from both the business side and the investor side.
I have no money on hand, can I raise capital by crowdfunding from scratch?
No. Although the image of crowdfunding as a tool to gather capital available to anyone, allowing those with nothing to realize a brilliant idea, is poetic, that's not what it's about. Crowdfunding is a marketing operation aimed at raising capital, but as such, it requires investments in marketing. We've already discussed the costs of crowdfunding: it can be done with little, but not with nothing. If you don't have a budget available for marketing investments, crowdfunding is not for you.
Does the platform bring investors to the crowdfunding campaigns it hosts?
The short answer is no. But it is important to read the long answer. One of the main misconceptions that lead to the failure of so many crowdfunding campaigns is the belief that investors come from the host platform's database of registered users. This does not happen or happens very little, for two reasons:
- people don't go to the platform and scroll through all the online campaigns to invest in the one that attracts their attention at the moment, instead they know in advance what to look for;
- platforms can only do (by law) generic sponsorship of their overall offering, not specifically advertise one campaign over another.
Platforms are a simple intermediary between companies and investors, providing the infrastructure for investment.
This argument applies without asterisks to equity crowdfunding. For lending crowdfunding, on the other hand, a clarification is necessary: lending-type investments often follow a cyclical dynamic, whereby the gain from the first investment is reinvested in a subsequent campaign and so on; what's more, there are many companies that do several campaigns in a row, even to finance different phases of the same project (it happens particularly in the real estate sphere). This creates within a single platform a community of lending investors who adopt this strategy to maximize the return on their investments and evaluate the open campaigns and the interest rate offered from time to time.
This does not detract from the fact that even for lending crowdfunding, one cannot rely solely on the investors already on the platform, which will never be enough to reach the goal: it is the company that has to do the marketing to bring its investors to the platform.
Where do I find investors for my project?
This question relates directly to the previous one, but the answer is much shorter: the main and best pool of investors is your company's customers or potential customers. We explain why in detail here. It can be summarized by the fact that those people are already interested in your product/service and therefore you have levers with them that you can use to initiate a relationship and dialogue and make them become investors: these levers are called "rewards."
How do I convince people to invest in my project?
Again, we latch onto the previous answer: with rewards! Rewards are not a prerogative of reward crowdfunding; they are the fundamental tool for any type of crowdfunding campaign. They are the key lever to hook potential investors: a brilliant idea, a good business plan, the prospect of financial gain are not sufficient reasons to convince people to invest, because they are either abstract and not immediately understandable factors (the first two) or distant in time and not guaranteed (the third). The reward, on the other hand, is a concrete and clearly defined reward that investors certainly get (regardless of the future success of the business) as soon as the campaign closes, thus at a fixed and known moment in time. And it is a reward that certainly interests your target audience, i.e., customers and potential customers, because it must be linked to your product or service: read the article on the use of rewards to find out all the secrets.
Want to learn more directly with our crowdfunding experts about the topic you are reading about?
Turbo Crowd can reveal to you all the tricks of the crowdfunding trade, explain the capital-raising opportunities available to you, and provide you with practical support to carry out a successful crowdfunding campaign.
Who sets the interest rate in lending crowdfunding?
The interest rate of a lending crowdfunding operation is agreed between the company and the crowdfunding platform based on the latter's risk assessment: the higher the company's risk class, the higher the interest to be paid to investors for the loan. The riskier a transaction is, in fact, the more expensive the loan is for the company: this is a principle that also applies outside crowdfunding. The lending crowdfunding interest rate is also influenced by the contingent market rate.
Who determines the value of shares in equity crowdfunding?
The value of shares sold through an equity crowdfunding campaign depends on the pre-money and post-money valuation of the bidding company, i.e., its value before the campaign and the capital raised, which determines the value after the campaign: we have discussed this extensively in another article. The pre-money valuation is submitted by the company itself to the crowdfunding platform, but the crowdfunding platform verifies its reliability and accuracy and can challenge it.
If I do an equity crowdfunding campaign, do I risk losing control of my company? What rights do investors have?
This is one of the most unwarranted and widespread fears among those approaching equity crowdfunding: no, doing an equity campaign does not result in losing control of the company. New shareholders who join the company by buying shares do so according to the rules that the company has established: campaign preparation includes determining what maximum percentage of the company to give up and what types of shares to recognize. Type A shares also include voting rights and should be limited to a few investors, that is, those who invest above a certain amount. Type B shares, on the other hand, include only equity rights. This scheme, of course, can be declined in different nuances. In addition, to facilitate the management of the corporate structure, one can group all crowd investors into a single legal entity, enter into para-social pacts, and many other strategies.
How do I pass the screening of a crowdfunding platform?
The selection of crowdfunding platforms aims to admit among proposals only those companies with a good chance of success and good growth potential. In order to identify them, platforms analyze both quantitative elements, such as revenue numbers, assets or market analysis and projections, and qualitative elements, such as the strength of the marketing strategy, the extent of the network of contacts and online presence, the relationship with stakeholders, the knowledge of the commitment required by crowdfunding, etc.: We have written an article with tips on how to pass the selection of a crowdfunding platform.
How long does it take to do a crowdfunding campaign?
It depends. The crowdfunding campaign itself, on the platform, can last from 30 to 90 days, rarely longer. It is also possible to split a collection into several campaign rounds within the same capital raise. But the most important part of doing a crowdfunding campaign is what comes before the opening of transactions on the site: the phase of preparing the necessary tools and materials (Onboarding) and the phase of engaging potential investors and gathering expressions of interest (Precrowd). These phases are absolutely subjective in duration, depending on the needs of the company: they can last a few weeks or months.
To learn more about other more technical issues and details of the European Crowdfunding Regulation, you can consult the crowdfunding FAQ document prepared by the European Securities and Market Authority (ESMA).
Do you need support in preparing a successful crowdfunding campaign and seeking potential investors for your project?
Turbo Crowd can accompany you throughout the process, from organizing the precrowd to closing the collection, developing effective and innovative marketing strategies to best promote your campaign.
