One of the most frequently asked questions by entrepreneurs new to crowdfunding is "but why invest in crowdfunding?" With a good dose of suspicion and mistrust, many wonder why a would-be investor would choose crowdfunding specifically as a financial instrument. A new, unfamiliar instrument that has higher risk than others (but also higher returns, ed.), completely online...
Yet crowdfunding, since it landed in Italy more than a decade ago, has done nothing but grow, so there must be some reason. If you are an entrepreneur looking for capital, first you need to find out what those reasons are and then explain to your target audience of potential investors why to invest in crowdfunding, possibly in your crowdfunding.
There is no universal, glittering "because you're going to be rich" motivation-no one believes that anymore, especially in the startup and SME arena where high risk is precisely due to uncertainty about the future of companies that are not yet solid and mature. But with high potential. Each type of crowdfunding offers investors or backers different motivations for investing.
Why investing in lending crowdfunding?
Lending crowdfunding, let's remember, is a capital-raising method that mirrors the loan mechanism: investors lend certain sums of money to the company, which will then be repaid with predetermined interest. Over time, this type of crowdfunding has especially established itself as a financial instrument for real estate projects, for which it is particularly suitable due to a series of characteristics.
What are the motivations that may lead a user to invest in lending crowdfunding?
- attractive returns: lending crowdfunding loans have on average higher interest rates than bank loans and consequently significant returns for investors;
- short term: lending crowdfunding campaigns usually last a short time, even as little as a month, and you start earning money early with repayments and interest payments;
- real estate sector: ability to access real estate even with small-scale investments and without the administrative burdens that real estate brings;
- soundness of projects: lending crowdfunding campaigns often involve projects that are already underway, with detailed progress planning and for which only a portion of the funds come from crowdfunding.
Why investing in reward crowdfunding?
Reward crowdfunding is a collection of funding for the development of a new product or service (but mainly product) based on the reward mechanism, which we explained in detail in a previous article. Unlike lending and equity, it is not a mode of crowdinvesting because there is no cash return on capital-it is all simpler.
Therefore, for campaigns of this type, it is usually easy to explain to users why to invest in crowdfunding:
- Participation in the process of production and market launch of a product through communications, updates and direct discussions with the proposing company;
- partecipazione al processo di produzione e lancio sul mercato di un prodotto attraverso le comunicazioni, gli aggiornamenti e i confronti diretti con la società proponente;
- Unique and exclusive rewards related to the project and/or product.
In reward crowdfunding, it is common for a user who has funded a company's first campaign to also fund the second: having personally participated in the production and launch of a product creates a bond with the producing company and gives importance to the user. These rather unconscious motivations are, therefore, in addition to the more overt ones. This is why it is advisable to do a modest first reward crowdfunding campaign, and then raise more resources with subsequent campaigns. crea un legame con la società produttrice e conferisce importanza all’utente. Queste motivazioni piuttosto inconsce si aggiungono, quindi, a quelle più manifeste. Ecco perché è consigliabile fare una prima campagna di reward crowdfunding modesta, per poi raccogliere più risorse con campagne successive.
Why investing in equity crowdfunding
Equity crowdfunding is the most "challenging" type of crowdfunding investment, so it is the one in which you have to work hardest to convince your potential investors to participate in the campaign. Equity crowdfunding investment, in fact, involves the purchase of shares in a company, so it ties the investor's profit with the company's profit in a double twist.
Quite a risk, especially in the startup world. It's not enough to wave the opportunity to be among the early supporters of the next "unicorn" or tech miracle that everyone will be talking about within a few years.
Here are the motivations of your potential equity investors:
- Become a partner in high-potential realities with a low-cost investment;
- obtain benefits along with the shares, i.e., rewards, which lower the risk of the investment and offer immediate gain;
- Have privileged or discounted access to the company's product/service;
- Make direct contact with the company's team and get to know firsthand the reality in which you are investing;
- Participate in second or third campaigns of bidding companies with a good previous track record.
Almost all of these investment drives depend directly on the proposing company. To successfully carry out a crowdfunding campaign, it is not enough to be online; you have to go out and get investors one by one by explaining to them why to invest in crowdfunding. In a convincing way. And we'll let you in on an encouraging secret: the more crowdfunding campaigns you run, the more convincing you become.
Turbo Crowd is Italy's first crowdfunding marketing agency, with many successful side-by-side campaigns behind it and the goal of guiding more and more entrepreneurs to their investors. To find out why so many startups (and more!) are believing in the effectiveness of crowdfunding, join our Facebook group. If you are already ready to get help explaining to your audience why investing in crowdfunding, book a free call with us!