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Wednesday, April 24, 2013

Understanding the many benefits of crowdfunding

Increased market exposure is a benefit of crowdfunding
Crowdfunding is a legal method of raising money for businesses

In addition to funding benefits, there are many other advantages gained when an entrepreneur takes part in crowdfunding. For starters, the ability to grow a customer base as well as an increase in brand awareness are two major advantages. Other ancillary benefits include the following:
• Press coverage
• Potential investor interest
• Traction
• Marketing
• Social proof
• Hedging risk
• Brainstorming
• Cost-efficient

Press coverage: When entrepreneurs take part in crowdfunding, they oftentimes obtain much press coverage. Many times, this coverage comes in the form of a television news broadcast, a blog posting or some type of print publication. Getting press coverage is very valuable because it can help an entrepreneur increase brand awareness for his or her startup and it adds valuable attention to a startup campaign. In many instances, the press coverage will attract investors that are outside of the entrepreneurs personal network.

Potential investor interest: Crowdfunding brings about many connections that entrepreneurs otherwise would not have formed. It is important to note that investors are ultimately interested in entrepreneurs who have established social proof and traction, and with these two characteristics in place, investors will be much more likely to provide startup funding.

Traction: When an entrepreneur takes part in a crowdfunding campaign, this helps to generate traction for the startup. The traction will be demonstrated from pre-orders of the products that are going to be sold, an extreme amount of media interest and/or through the securing of investors. An entrepreneur will most definitely need as much traction as he or she can get because it will need to be pitched to investors so that funds can be obtained.

Marketing: As entrepreneurs take part in crowdfunding campaigns, as an added bonus they are marketing their startup.

Social proof: As clients and investors become interested in a particular crowdfunding campaign, this creates social proof; this social proof conveys to others that people believe in an entrepreneur's startup.

Hedging risk: Startups often involve risky investments. In addition to finding startup funds, entrepreneurs must also be prepared to pay other expenses. To help hedge these risks, crowdfunding is a solution. The campaign allows for an entrepreneur to validate his startup on the market before actually giving up any equity.

Brainstorming: One of the reasons that most startups fail is because they are not prepared for the challenges that oftentimes make themselves present when a business first starts out. Crowdfunding enables entrepreneurs to engage with consumers and investors, allowing them to gain much needed feedback and ideas, many of which may determine the success or failure of the startups. 

Cost-efficient: Entrepreneurs do not have to pay a fee to take part in crowdfunding. Instead, crowdfunding campaigns provide a great way for entrepreneurs to obtain free financing without having to worry about breaking the bank before the startup even gets up and running.

About the author: Derek is currently blogging for Startup Valley. A  crowdsourced investing site that helps small businesses and start-ups get investments. 

Image credit: Danielfungss; CC BY-SA 3.0 

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