What are the chances of attracting financing for your project with crowdfunding?

Crowdfunding is an innovative method of fundraising that many entrepreneurs are still hesitant to use. This fear is absolutely baseless! While crowdfunding hasn’t been around for a long time, many interesting projects have already used it to facilitate their launches. In this article, we will explain why the popularity of crowdfunding is on the rise and discuss the current outlook for this method. 

The crowdfunding market: Trends and forecasts 

Initially, many companies face difficulties in attracting financing: they need to quickly find funds for business development, otherwise they will be forced to leave the market. Not everyone succeeds in finding their own business angel – a major investor prepared to invest a large sum in the development of the project. Because of the crisis caused by the COVID-19 pandemic, finding such an investor has become an even greater challenge.

Launching a crowdfunding campaign is an alternative method of raising funding. In this case, the project is showcased on a specialized site, a crowdfunding platform, and everyone is invited to donate as much as they want to support the project. Backers, those who have made a donation, usually receive a reward: a product, company shares, personal acknowledgements from the founders, and so on.

This method of raising funds was officially called “crowdfunding” in 2008, in the United States. Since then, crowdfunding has been actively developing. Specialized sites were created to raise funds for various projects: charities, investments, creative and personal projects. In the 2010s, the growth of the crowdfunding market accelerated: from 2013 to 2016, the crowdfunding market doubled annually.

Crowdfunding showed the most rapid growth in the United States: by 2015, the volume of the market had reached $17.2 billion in the States, with only $10.6 billion in Asia and $ 6.5 billion in Europe.

However, crowdfunding has yet to reach its peak in all countries. In certain regions, for example, in Russia, crowdfunding has not yet reached a serious level. Its further development is primarily harmed by the following unfavorable factors:

1. In the United States, the active development of crowdfunding began in 2008, and in Russia – only after 2012.
2. The residents of Russia are not in the habit of investing, so they are less actively involved in crowdfunding projects. As of 2020, only 2 million people in Russia had invested out of a total population of 140 million. Until 2020, the number of investors was even smaller. Because of the COVID-19 pandemic and a decrease in interest rates on deposits at the Central Bank, people began to buy securities more often.

Crises always negatively affect the financial activity of the population. However, in these situations, crowdfunding can be used as a win-win strategy, which is beneficial to all participants.

Crowdfunding in a crisis

In crisis situations, the purchasing power of the population falls, but people also become more open to new opportunities. In many countries, central banks are lowering interest rates on deposits, which encourages people to look for alternative ways to keep their savings and make a profit.

The second important advantage of crowdfunding in times of crisis is that it allows you to buy the most advanced new products practically at cost. For example, the Pebble smartwatch was available on Kickstarter with a $99 donation. In stores, the watch went on sale at a price of $150. Backers were able to get a next-generation smartwatch at a discount of more than 30%.

These factors should have a positive impact on the growth of crowdfunding financing after the pandemic. According to data from Statista, the amount of funds raised through crowdfunding last year increased by 33.7%. The service predicts an annual increase in the “transaction price” indicator of 3.3% for crowdfunding over the next five years (2021–2025).

As founders gain experience, they are able to complete successful campaigns more often. If they previously had to wait for attention and donations for the development of the project without doing any preliminary work, the situation has changed. Campaign organizers have started working with social networks and conducting PR campaigns in order to increase the chances of successfully completing their crowdfunding campaigns.

Crowdfunding is also positively impacted when established brands such as Coca-Cola, Lego, and Gillette started using crowdfunding campaigns to test new products. 

Gillette used a crowdfunding campaign to test its innovative heated razor. The company promoted the product, claiming it provided a similar sensation to shaving with a hot towel at a hair salon or barbershop. The marketing research needed to get information about the level of demand would require additional investment from the company. With a crowdfunding campaign, Gillette not only obtained the necessary information, but also attracted additional funding. The company managed to secure pre-orders for 1,232 products, almost six times more than originally planned.

In the future, crowdfunding can attract significantly more funds. This is due to current market trends, including the growing interest in crowdfunding from large companies. Crowdfunding allows you to attract funding even in difficult times, because backers are more inclined to try new things during a crisis. However, the level of mistrust in founders during the crisis is also growing: in order to attract funding, founders should carefully approach the task of writing a project description and make sure to post updates in a timely manner.