Crowdfunding and alternative sources

Not all capital comes from the public sector or from investors. There are a number of alternative sources suited to different situations — and for many companies the best financing is actually the kind that comes from the customers themselves. This lesson gives you the overview of the rest of the toolbox.

Three types of crowdfunding

Crowdfunding means raising smaller amounts from many people, usually via an online platform. There are three main types, and they are very different:

• Reward-based: people pre-buy the product or receive a token of thanks. You give up no ownership and repay no money — you deliver a product. This suits physical products with broad appeal, and works at the same time as marketing and validation.
• Equity-based: many small investors buy shares in the company via a platform. You raise equity, but end up with many small owners, which places demands on how you manage your shareholders.
• Lending-based: the crowd lends the company money against interest, often called peer-to-peer lending. You keep ownership, but take on a repayment obligation.

An important point: crowdfunding is regulated. The equity- and lending-based forms in particular are subject to rules, including common European regulation of crowdfunding platforms, with supervision from the Financial Supervisory Authority. The platforms handle much of this, but you should know it is not a lawless space.

When crowdfunding makes sense — and not

Crowdfunding works best when you have something that engages a broader group: a product people want to show off, a cause they believe in, or a brand with clear personality. The campaign requires a lot of work on storytelling, video and marketing, and a failed campaign is publicly visible.

It fits less well for complex B2B products without popular appeal, or when you need a professional investor's competence and network more than you need the money itself. See crowdfunding as one possible tool, not a shortcut around the hard work of building demand.

Loans, supplier credit and factoring

Debt financing does not dilute you, but it must be serviced. Some common forms:

• Bank loans: usually require security or a predictable cash flow, which young companies often lack. Here a guarantee from Innovation Norway can be what makes the bank say yes.
• Supplier credit: getting deferred payment from your suppliers. It is in practice interest-free short-term financing — negotiating payment terms is an underrated source of liquidity.
• Factoring: you sell or borrow against outstanding invoices to get the money faster. Useful if you have solid customers but long payment terms that tie up liquidity.
• Leasing: instead of buying equipment expensively up front, you rent it and pay over time. It ties up less capital, but usually costs more in total.

Customer- and revenue-financed growth

The cheapest and least risky capital is the kind you never have to raise: money from customers. Letting the company grow on its own revenue — bootstrapping — means the customers finance your development.

Concrete moves can be advance payment, annual subscriptions paid up front, pilot projects the customer pays for, or charging early instead of building for a long time before the first krone. Every krone you raise from a customer is a krone you avoid raising from an investor in exchange for ownership. For many companies this is not just a fallback, but the healthiest growth there is. The earlier you charge, the less other capital you need — and the more of the company you keep for yourself.

An example

A founder with a design product in Bergen runs a reward-based campaign where customers pre-order. The campaign provides both capital for the first production run and proof that people want the product. Later, when she needs operating liquidity because the retail chains pay late, she uses factoring on the largest invoices instead of raising new equity. Neither diluted her ownership.

Do this now

List all the ways your company can raise money without giving up ownership: advance payment, subscriptions, pilot projects, supplier credit, factoring or a crowdfunding campaign. Choose the one that is easiest to start this month, and make a concrete plan to test it. Rules for crowdfunding can be found at the Financial Supervisory Authority (Finanstilsynet).