Crowdfunding to validate your business idea

Have you ever thought about the crowdfunding to validate your business idea? Business idea validation is the process by which a company or aspiring entrepreneur verifies whether its product or service meets a real demand in the market. This crucial step reduces entrepreneurial risk and optimizes the initial investment, ensuring that the idea is sustainable before committing to full development. Crowdfunding, in this context, proves to be a powerful tool for business development, because it is able to combine capital raising and direct feedback from the market.

Validating a business idea: how to do it

There may be several specific validation strategies-for example, the Lean Startup method - But the general pattern of this process is unambiguous.

1. Definition of key assumptions

Every business idea starts with fundamental assumptions: who the target customer is, what problem is to be solved, and how the product or service devised is the best solution to do so. These assumptions must be specific and measurable.

2. Construction of a Minimum Working Product (MVP)

A Minimum Viable Product (Minimum Viable Product) is a simplified version of a product or service designed to quickly test the market with minimal investment. For example, it may be a prototype, a landing page or a beta version, with only essential functionality, of a service.

3. Feedback collection and measurement

Through direct interactions with customers, useful data are collected to verify initial assumptions. Feedback may relate to price, product features, or distribution methods.

4. Iteration and improvement

Validation results are used to refine the product or, if necessary, to change the business model or target market.

Why is crowdfunding useful for validating your business idea?

Crowdfunding is known as a mode of financing that uses special online platforms to raise funds from a wide audience. More than just a tool for raising capital, however, it represents an extraordinary validation opportunities. 

Crowdfunding complements and enhances the validation process described in the previous section in several ways:

• Measuring market interest: Investors and supporters are also the first users of the product, offering a direct indication of its appeal.
• Simulation of a real market: Crowdfunding platforms act as miniature markets, where potential customers decide whether to "buy" (in the case of reward-based crowdfunding) or invest (in the case of equity crowdfunding). This provides a direct simulation of market demand.
• Market data collection: The number of supporters, amount of capital raised, comments, and interactions provide valuable indications of interest in the idea. Know the KPIs to be analyzed is critical to take advantage of this privileged vantage point. 
• Test of price and perceived value: Through a campaign, it is possible to check whether the proposed price is competitive and appropriate to the value perceived by customers.
• Immediate feedback: Investor comments and questions help to understand the strengths and weaknesses of the project.
• Iterative approach: With the results of the campaign, it is possible to improve the product or service and, if necessary, change direction, according to market needs.
• Targeted fundraising: In addition to validation, crowdfunding allows for capital needed to implement the previous point, i.e., the changes that emerged during the testing process.
• Community creation and emotional engagement: An initial supporter base can turn into a group of loyal customers and brand ambassadors. Supporters of a campaign, in fact, amplify word of mouth and create a community of early adopters. This aspect is particularly useful for measuring audience engagement with the brand.

Different types of crowdfunding are suitable for specific validation goals and business steps: let's find out how to use them and When is the right time to do crowdfunding.

Equity crowdfunding for validation

Equity Crowdfunding offers investors to acquire company shares in exchange for invested capital. It is the most useful mode for the validation of a business idea of a completely new startup or to launch a product or service in a new market.

When to use it: In the early stages of a startup's life (stage seed e growth) or in an expansion phase of an SME or otherwise an established company. Indeed, at these stages, it is important to be able to count on deep investor involvement and to have access to strategic business development expertise and professionalism that can provide valuable and reasoned feedback for product/service validation, combined also with concrete support.

Equity crowdfunding, at these stages, allows a robust foundation to be laid for a project, either through capital or through an initial market testing, and to demonstrate the feasibility and value of the idea, product, or service to subsequent investors from whom you will want to raise capital for the growth of the business idea. 

An example of this is the experience of CleanBnB, a short-term rental management company that used equity crowdfunding as a springboard to test the market while simultaneously making itself known and acquiring the resources to make its idea a reality.

In a new market, also proves to be an invaluable tool for getting to know the terrain and new potential customers closely and gathering useful contacts.

An example of this second use was the crowdfunding of Winelivery, aimed at expanding the service to all of Italy and abroad after the first years of testing in the city of Milan.

Reward crowdfunding for validation

The Reward Crowdfunding involves supporters receiving a reward, often in the form of product pre-sales and special prizes for the early adopters.

This model is ideal for Test potential customers' response to new products or new versions of a product from a company already on the market.

When to use it: for the launch of a material product, to test its commercial potential, particularly if it is technology products, video games, board games, innovative items, alternative versions of products already on the market.

Reward crowdfunding, in this context, makes it possible to verify the existence of demand for a product, to reduce the risks of premature production with its associated costs for materials, labor, machinery, etc., and to make any corrections to products at the right time.

In our article on reward crowdfunding examples of success can be found many cases of companies that have used this mode of capital raising to validate a product. One such case is Pebble Time, an innovative smartwatch that raised $20 million on Kickstarter, demonstrating tremendous interest before even starting production.

Another example is Flow Hive, an innovative beekeeping system, which validated the product before market launch by raising $13 million on Kickstarter.

Participatory financial instruments for validation

The PFI are hybrid securities that allow companies to raise capital without giving up immediate corporate shares, but offering equity or administrative rights (excluding voting) and the ability to convert the securities into shares following a date or financial event in the company's future. 

When to use them: in the initial stages of structuring an enterprise, when it is necessary to attract strategic investors or directly involve employees and suppliers.

SFPs, in fact, make it possible to actively select investors who not only provide capital, but also skills and knowledge useful for project development. This makes it possible to Validate the company's ability to attract quality stakeholders and measure interest in the idea itself among a knowledgeable audience.

In addition, they are fully customizable securities: companies can issue SFPs tied to a single new project or product line to be tested. Equity rights can include remuneration based on the performance of that specific project.
Finally, SFPs impose fewer immediate burdens than other forms of capital raising. This simplicity makes them ideal for Startups that want to test the market without immediately facing the complexity of pre-money valuation. Discover the differences between SFP and equity crowdfunding to figure out which is best to use to validate your business idea and how the two modes can be combined.

What about lending crowdfunding?

The Lending Crowdfunding, which is an alternative lending model, is the least suitable type of crowdfunding for validation because it usually involves an already advanced and established project. 

It can be useful, however, for an already structured company to validate specific projects, perhaps collateral to the main business, or for projects that are closely linked to a local area or circumscribed audience and to validate, rather than the product/service itself, a mode of financing and marketing that is repeatable over time.

Conclusions

Integrating crowdfunding into the validation process means not only reducing market risk, but also accelerating the development of a business that meets the real needs of customers. To do this, it is necessary to know the various crowdfunding modes and all the strategies for making the most of them: find everything in our blog!