Considering Crowdfunding? Why You Need a Strong Business Plan First
Crowdfunding is a thrilling prospect. Connecting potential entrepreneurs will millions of micro-investors, the platform has helped fund and launch countless new enterprises, and it’s given a realistic platform for countless of bright young business owners who would otherwise have nowhere to go.
But crowdfunding isn’t a magic solution; it isn’t a money tree, nor can it be fully taken advantage of by any business that signs up for it. Like with pitching to angel investors or venture capitalists, you’ll need to have a solid foundation for your idea before jumping onto your crowdfunding platform of choice; without one, you’ll become one of the vast majority of hopeful entrepreneurs who find themselves without enough capital to keep moving.
If you have a great idea and you’re excited to see how much attention or capital it can generate online, stop for a minute. Write a business plan first. Here’s why.
It will help you work out the kinks
Your product isn’t perfect. Even your idea isn’t perfect. When you first came up with it, it likely seemed like a miraculous gift, but that’s because you hadn’t had a chance to think it through fully. If you take your freshly concocted idea straight to the crowdfunding market, your audience’s first impressions might be wasted on a flawed model. Taking the time to write a business plan instead can help you work out the kinks of your product — and your core idea. Business plans force you to work through the challenges, and force you to evolve to a more effective model, which will ultimately increase your chances of getting funded.
It will tell you how much money you actually need
It’s easy to speculate about how much money you need to start things up, especially if you’re basing your figures on a number of assumptions. If you’re making a prototype, you might know what the production costs are, but there are dozens of hidden costs — like material waste, shipping, and salaries for additional help — that can interfere with your progress. Writing up a business plan will help you flesh out these potential costs and prepare the amount of money you’ll actually need to get off the ground. It can also help you come up with reasonable offerings for each donation level that allow you to remain profitable.
It will ground your expectations
As entrepreneurs, we are liable to let our hopes and ideas take over the rational side of our brains. We get excited and run with an idea before thinking through the real world applications, challenges, and limitations. Business plans exist to help you prepare for those obstacles and force you to set realistic, measurable goals for your initial launch. It will also help you understand the competitive landscape, the behaviors and patterns of the current market, and how your product could realistically fit among them.
It will help you position your product
Unfortunately, having a great product simply isn’t enough. You also need to be able to position that product correctly to your target market. You need to understand who your audience is and why they need your product, and then brand and position your product according to that data. Writing up a business plan will force you to research this information and put together a cohesive plan to brand and market your product. Once you have that done, you’ll have a much easier time making the sell to your potential crowdfunders.
It will give you a gameplan to show your potential investors
Some crowdfunders are merely interested in getting something in exchange for their investment (i.e., a sample or prototype of your product). Others only invest in ideas that have real long-term potential. If you want to prove your potential to these investors, you’ll need an actual long-term plan for your business, and in order to answer their questions and address their concerns, you’ll need a master business plan to rely on.
It will ensure your funding gets put to good use
Imagine your funding goals are met and you aren’t fully prepared for the first few months of operations. You could spend your money on the wrong things. You could have underestimated the amount you needed. You could mismanage your cash flow, and ultimately lose all the capital you worked so hard for. Writing up a reliable business plan before you get funded will help you ensure that money does its job in supporting your business’s growth.
With a solid business plan in hand, you’ll have a much higher chance at succeeding when you pose your idea to the crowd. Not only will it help you create a more solid, unique, fund-worthy product, it will also help ensure your money is collected and used responsibly for the long-term so your entrepreneurial bubble doesn’t burst.
For more content like this, be sure to check out my podcast, The Entrepreneur Cast!