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Choose wisely: Crowdfunding through the stages of the startup life cycle
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Choose wisely: Crowdfunding through the stages of the startup life cycle
Crowdfunding refers to the capital formation by strategically selecting networkers, which
in this instance are the crowd, using online platforms referred to as crowdfunding platforms.
Startups are uncertain about choosing or using crowdfunding because of a lack of proper
direction on which type of crowdfunding to use at different stages of life cycles. To respond to
the issue, this article by Jeannette Paschen (2017) introduces a study of crowdfunding, its
advantages or the value it adds, and how these specific advantages relate to the acknowledged
crowdfunding types.
Startups require a lot of related resources to the specific works involved, but to succeed in
different setups, money is one of the most common and influential. Traditionally sources of
capital encompassed mainly 'friends, family, fools, angel investors, venture capitalists, and seed
funding.' Overcrowding has emerged as a new form where huge groups contribute small
amounts. Startups have barriers to accessing traditional sources such as banks, venture
capitalists, or angel investors (Paschen, 2017). In this article, different types of crowdfunding
are most appropriate for startups in different life cycles. In the donation model of crowdfunding,
the founder receives funding in the form of a grant where the funder expects no return or
compensation. In its other form of reward-based donations, non-monetary support is offered in
incentives, rewards, and privileges. Donation crowdfunding is suitable for the pre-startup stage
of the life cycle since it offers more operational flexibility. Therefore, it can provide capital to
move to other stages of startup cycles, where the founders will be able to seek more fundraising
options.
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Lending crowdfunding, also referred to as peer-to-peer or peer-to-business crowdfunding,
is the opposite of the donation model as it requires or expects the founder to pay back or
compensate the supporter for the assistance accorded. This type of crowdfunding is the most
prominent form and comprises three setups. The first is the presales lending which entails
repayment with the finished product. The second is the traditional landing which is repaid with
interests outlined before its commencement. Lastly is the forgivable lending that facilitates the
founder and only requires reimbursement when the project starts to generate income or revenue.
The lending crowdfunding is suitable in the startup cycle of life (Paschen, 2017). After
establishing a product and validating it to fit the market, resources are required in product
building to accommodate the consumers' needs, human resources, operational costs, market
establishment, and commercial launch. Lending crowdfunding is best suited to offer monetary
assistance. The startup cycle requires more funding than the pre-startup; thus, lending
crowdfunding is suitable as it provides higher capital.
In equity crowdfunding or investment crowdfunding, investors are offered equity or
shares to have a stake of ownership in a firm. This crowdfunding type is the fastest growing and
comprises investor- and entrepreneur-led equity crowdfunding (Paschen, 2017). Equity
crowdfunding offers monetary returns to the investors, making it most suitable for the life cycle
growth stage. The success of the startup stage translates to the birth of the growth stage. The
funds generated at the startup stage may be used to acquire another entity or liquidate to offer the
founder a healthy exit; whichever the case, it's a growth.
In conclusion, founders are urged to adopt best practices to attract the crowd and secure
favourable contributions. The founder and the funder's relationships and transactions will
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automatically lead to the determination of either a healthy and efficient outcome or vice versa.
The article proves that crowdfunding can be critical in providing a resource base.
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References
Paschen, J. (2017). Choose wisely: Crowdfunding through the stages of the startup life
cycle. Business horizons, 60(2), 179-188.