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Finding additional resources to finance a business idea is not an easy task. Potential sources include personal savings or loans from friends, business angels or venture capitals, investment funds, banks, etc. In recent years, crowdfunding, whether loan-based or participatory, has also been a generally popular alternative among the general population.
Imre Noorkikas, a member of the Crowdestate team, will hereby analyse the three primary factors for success that should be taken into account when collecting additional resources with crowdfunding, considering primarily the point of view of new businesses.
Value proposition for a client
In principle, a value proposition is giving a reason to purchase a product or a service. New and unknown companies that seek to approach a client have to give particularly clear value propositions. As said, a company that is looking to collect additional resources has to be able to explain to potential clients why they should purchase a product or service, why they should prefer that specific company, what makes the company stand out from the competition, and which issue or situation in the market are they hoping to solve or improve with their product or service. One should also remember that a mere slogan is not sufficient to qualify as a value proposition.
The target of a value proposition is the client who will potentially purchase a product or a service. Different clients have different opinions on the concept of value. They may regard it as a technical, economical, safety, social, or any other aspect that is important for an individual. Everything depends on who is willing to invest their money and what their financial competence is. For that reason, in the context of a value proposition, it is extremely important to identify the target group, to reach the target group, and to explain the values. This is even more complicated for someone just entering the market. A new company has to be willing to open up completely and be ready to prove that their claims are truthful. In summary, one has to reach their client, initiate a dialogue, and demonstrate and explain the values that they have to offer.
It only takes one person to generate an idea. But it takes a team to realise the idea and turn it into a business that produces a positive cash flow. When assembling a team, one should not limit their choice to the start-up phase. On the contrary, the initial aim should be to break out of the start-up phase and develop the business further. This requires a more versatile team. On the other hand, everything that is created in the start-up phase will be the foundation for the subsequent success or failure. Product development and design, marketing and sales, accounting, financial management, etc. are aspects to consider from the very beginning.
The atmosphere of a new business is extremely fascinating, but also intense, unstable, and definitely not for everyone. Therefore, when assembling a team, one should be very careful about the characteristics that are required for a specific phase. Preferably, the team should consist of proactive, self-motivated, and fast learners who are ready to react to change and completely focused on achieving goals. One should remember that the different phases of development require people with different characteristics: any business should use it as a base and react proactively. An analysis conducted by CB Insights on the main reasons for the failure of start-ups revealed that choosing the wrong team proved to be the third most common reason (on 23% of all cases) for failure.
The importance of demand
The next important step for a new company is to identify the demand, or the existence of a potential market. In reality, one could be faced with a situation where they have created a great product or service and assembled a professional team, but a potential market, or the number of clients, turns out to be limited. Identifying demand (determining the sustainability of the business plan) is critical for the business as well as for a potential investor. However, this part is often neglected. This results in a situation where it is difficult for potential investors to evaluate the premises specified in financial models, the prognosis of a relation between expenses and income, the value of the company, and the feasibility of a business plan as a whole.
Determining a potential demand is, in principle, related to the value proposition mentioned earlier. The value proposition should, in turn, identify a potential client or a group of clients, then, the capacity of clients, and, finally, the extent of potential demand. In a situation where a company enters the market with a new product or service, it is reasonable to consider at least two different scenarios when defining the premises: a realistic version, i.e. the one used when entering the market, and a so-called high-risk scenario, i.e. the one that includes possible room for mistakes that the company could still operate with. The analysis conducted by CB Insight on the main reasons for the failure of start-ups revealed that capturing the demand was a number one cause (42% of all cases) for failure.
Remember that there is no certain rule for the success or failure of a crowdfunding campaign, because there are so many various factors to consider. We have often heard stories about how a seemingly small and irrelevant product has collected 300% more investments than initially planned because it just ‘spoke’ to people. Not as often do we hear of stories where a business owner has assembled a professional team and conducted proper analysis, but is unable to find a connection with the investors.
If you are planning on finding crowdfunding, we recommend to schedule an appointment with us, stop by our office, and let us review your ideas together. The first consultation puts no obligations on you – not even paying for the consultation, because it is free.
More information on collecting finances through Crowdestate is available HERE.