Though an early-stage social enterprise should prioritise bootstrapping as its means of financial sustenance, for some, this is not always a viable option. Converting some ideas into businesses can be capital-intensive, particularly those dependent on expensive production, research and development. This is why crowdfunding is becoming the go-to option for so many entrepreneurs, including those launching a social enterprise.
Traditionally, social entrepreneurs in need of capital would opt for one of two routes, 1) approach a bank for a loan and pay interest, sometimes in exchange for collateral and/or 2) approach high-net worth individuals for cash in exchange for stake in their company.
Today, the former has declined in demand due to the introduction of more affordable alternative finance models.
For many entrepreneurs, securing investment has become a common metric of success, meaning entrepreneurs are willing to take on high burn rates, intense pressure and hockey-stick style growth trajectories in exchange for cash. Unfortunately, this ends up killing many companies before they even get a chance to shine. This is especially true for social enterprises that are tackling two problems with one business model: sustainability and impact.
A crucial step that many social enterprises are skipping is the market validation stage. When you’re low on capital, you’re forced to use resources efficiently and utilise all tools at your disposal to make the business succeed. When you’re still figuring out the vision of the company, building the prototype and testing the market need, the last thing you need is external pressure and exertion of control. During the early stages of a company, utilising resources efficiently is vital for survival and raising money from investors or applying for grants can become a huge distraction.
This is why entrepreneurs are exploring alternative finance models and is why the crowdfunding market has grown from £3.2billion in 2015 to £4.6 billion in 2016 (NESTA). Crowdfunding brings together a group of passionate supporters to fund a project that they believe in bringing to life. Launching a rewards-based crowdfunding involves putting together a 30-day online campaign comprising of a video pitch, high-quality product shots, details on traction, business model, team and press. The campaign is used to secure pre-orders and sales to assess the demand for the product. Running a campaign with a deadline means you have a chance to create urgency around your product and/or service to sell your idea to customers. If you meet your funding goal, you get to turn your idea into a business and if you’re unable to meet your target, you now have direct feedback from the market giving you the opportunity to refine and launch again.
Here are 5 reasons why rewards-based crowdfunding is becoming a vital tool for Social Entrepreneurs:
Market validation – Getting feedback from customers and beneficiaries is a key component to building a successful product and company. Crowdfunding is an inexpensive way of reaching thousands of potential customers and beneficiaries and finding out what they think. Instead of putting an order through for manufacturing your product, hiring staff, building a website or investing in other expenses, you can create a campaign page and test how many people are interested in buying your product. You’re able to go directly to your customers and sell your idea.
Pre-orders/Sales – The success of a startup is measured by its traction. Without sales or month-on-month growth, it’s hard to sustain a company. Through crowdfunding, you have direct access to a market and are able to sell to your potential customers to secure pre-orders for your product. If you meet your goal, you have demonstrated market traction which forms the basis of any successful company. You can then use this traction to scale the business, either through further investment or sales. Crowdfunding enables you to attract buyers who are willing to pay you cash today for the promise of you and your team fulfilling it at some point in the future.
Brand awareness – social enterprises success depends on community-centric models – if you launch a campaign right, you build an awesome tribe that follows your journey from here onwards. These are the people that are taking the plunge despite no guarantee of you fulfilling their order, all because they believe in you. They’re giving you their money on a promise and trusting you even though the product does not exist yet. You can’t build this type of bond between a buyer and seller anywhere else. Not only that, you get to create awareness amongst customers, industry leaders, journalists, possible hires and even investors. You’re also able to create brand ambassadors as people wanting your product understand that without a successful campaign, the product will not get shipped. This results in organic growth and engagement which fosters deeper and more meaningful relationships between you and your community.
Access to low-risk capital – the reason why alternative finance has grown so rapidly is because entrepreneurs are reluctant to give up equity or pay high interest on loans when first starting out. When you’re still deciding on the vision and direction of your company, it’s imperative that you do this on your own terms – this can only be achieved if the control stays with the founding team that conceptualised the original idea. Without investors or banks hijacking your vision, you can test the market and validate the need for your product by launching a crowdfunding campaign to collect orders. As there are no upfront costs and you only have to pay the platform if you succeed, you’re playing in low-risk territory.
Intros to potential investors/press/hires – speaking to people or organisations who could put sizeable sums of money towards your business is crucial for a crowdfunding campaign. This could make or break your campaign, and/or scale your business through investment. It also helps to completely hone your pitch before you start raising impact investment if and when required. If the power of crowdfunding is harnessed correctly, it can give products access to additional capital, major press or an opportunity to go ‘viral’. You’re able to be innovative and creative with your story and reach those customers big brands are unable to reach due to lack of storytelling.