Despite how it’s been portrayed, crowdfunding is not simply a way to “go viral.” Instead, when planned and used effectively, crowdfunding can create a community of engaged partners that can catalyze an ongoing marketing and fundraising campaign.
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What is Crowdfunding?
Crowdfunding is the idea of soliciting individuals, from close relatives to strangers across the world, to help fund your business through small investments. Although the concept of asking friends and family to help with business funding has been prevalent since the very first entrepreneur reached out to their parents for a loan to keep their fledging business afloat, the digital age has allowed small business owners to set up crowdfunding campaigns online and forgo big banks (which, on average, reject eight out of 10 applicants).
Hundreds of online crowdfunding platforms give entrepreneurs the ability to set up their campaigns in a number of ways. From securities-based crowdfunding to rewards-based crowdfunding, small business owners can create an engaged community of partners. So, the question is: where do small business owners begin?
How to Get Started
Thanks to thousands of previously executed campaigns, there is no secret to crowdfunding success, but rather a recommended formula. This formula can be applied to campaigns of all kinds, and entails answering important questions and following pivotal steps.
Step 1: Determine if Crowdfunding Right for You
Crowdfunding is about connecting and engaging with a community of people interested in your project, cause, or campaign. These people want a “return on caring”–rather than just the opportunity to invest in a business and are interested in getting involved with your campaign to help make it a reality. However, before setting up your campaign, it is pivotal to ask yourself two questions:
- Do you have the time and resources necessary to run a campaign? It is important to understand that a crowdfunding campaign is more a marathon than a sprint.
- Is your venture or new idea something people will rally behind online?
If you answered yes to both of these questions, continue to consider implementing and executing a crowdfunding campaign.
Step 2: Determine if Crowdfunding Right for Your Stage of Business
Crowdfunding is typically used by three different types of businesses:
- New businesses can use a crowdfunding campaign to raise equity in an attempt to get off the ground and establish themselves as legitimate.
- Established businesses can raise debt financing through equity crowdfunding in an attempt to become more profitable or can use a crowdfunding campaign to raise funds for a new product or service.
- Nonprofits can use crowdfunding to raise donations.
Crowdfunding can be a useful platform for a variety of industries and business structures. For example:
- Brick and mortar shops may benefit by generating awareness in their communities.
- Technology ventures can gain a following of devout contributors who are adamant about bringing a new idea to market.
- Manufacturers can reach people in different time zones who are eager to purchase a product.
- Artists can appeal to niche markets all across the world to gain a following and to raise capital.
Most effective crowdfunding campaigns have one thing in common: their creators leverage their stories in an attempt to create social capital and use crowdfunding platforms not only to raise money, but as a marketing tool to grow a community.
A successful crowdfunding campaign is not necessarily one that reaches a monetary goal, but rather a campaign that converts a crowd into a community of engaged partners. If raising capital is your only goal, consider these alternative or traditional funding options.
Step 3: Choose Which Platform is Most Appropriate for Your Campaign
There are hundreds of different crowdfunding platforms available, which makes choosing the appropriate platform for your campaign essential, but also potentially difficult. Crowdfunding platforms have different value propositions and target markets, so consider the following when picking your platform:
- Demonstrated Success – Look for similar campaigns that have hit or exceeded their goals.
- Provided Resources – Does the platform make your life easier compared to other platforms?
- Insights – The platform should be standardized, give you information on which processes result in greater success with campaigns hosted on the platform, and give you insight into your campaign performance in an attempt to positively influence your outcome.
- Existing Community – Look for a platform with an existing community that cares about issues or products related to your campaign.
Some prevalent business-related crowdfunding platforms are:
- Indiegogo – Indiegogo is a platform that offers plenty of support through the entire process of bringing your new idea to market. In addition to a guiding you through campaign creation, Indiegogo helps you create a pre-campaign buzz and provides a marketplace where you can research successful campaigns.
- Kickstarter – Kickstarter’s mission is to help bring creative projects to life. The platform supports creators of all types, and lauds its community as vibrant and supportive. This community is the platform’s main draw, as it strives to ensure that creatives will connect with an audience that truly cares.
- Fundable – Fundable is dedicated exclusively to helping companies raise capital. The platform is a leader in business crowdfunding because of its hands-on service, founder friendly outline, and committed network.
Before choosing a platform for your campaign, it’s important to understand the differences between rewards-based and security-based crowdfunding. Rewards-based crowdfunding, which is also referred to as donation-based crowdfunding, creates a dynamic relationship with your audience through the exchange of contributions – donors receive certain perks in exchange for giving you money. Security-based crowdfunding, on the other hand, consists of debt and equity crowdfunding, which focus on a lender’s return on investment.
Debt-based crowdfunding involves loans, and equity-based crowdfunding involves selling shares. Those who buy shares earn a stake in your business, and reap rewards if your company is profitable. But not everyone can do equity-based crowdfunding, since laws vary state by state. For this reason, it’s important to understand the parameters of the law prior to beginning your campaign. When in doubt, consult a lawyer.
Regardless of your chosen platform and contribution model, you’ll have to decide between a fixed or flexible campaign. A fixed campaign is used for products and requires that a certain monetary goal be met; otherwise, you cannot receive the money you raised. A flexible campaign ensures that the money you raise will enter your pockets, since you can take home what you earn, but typically the platform will take a higher percentage for this arrangement. Definitely do your research, including looking into the percentage each platform takes before setting up your campaign.
Step 4: Build a Knowledgeable Team with Experience
Just like your business, your crowdfunding campaign requires a knowledgeable and experienced team. Create a campaign team that consists of trusted people who will help you implement your strategy, assist you in networking, and help make your dream a reality.
Step 5: Create a Detailed Business Plan
Be prepared to share lots of information about yourself and your company. An extensive amount of information is required if anyone is to invest in your campaign – people want to know about you, your story, your background, and your plans for the future of the company. A detailed business plan will dispel any questions people may have, as well as outline the features of your company that will benefit your target market. In short, a detailed business plan will make your life easier and improve the chances that your campaign succeeds.
Step 6: Plan Outreach and Social Media Strategies
For a campaign to be successful, it is imperative that you draw from your own community, and your community’s community. Doing so requires a fair amount of coordination and effort – relationships must be formed and maintained, updates are essential, and a demonstration of your plan is a must.
You should view your campaign as a marketing channel, too. This means that you will need to know with absolute certainty what your target market is, what type of person will donate, and why. Strategize how you will market to your targets, and make your story as precise as possible. This will ensure that your message will be communicated clearly to your audience.
In most cases, it is imperative that your campaign includes a video. A three-minute video is standard, and necessary for some platforms. Campaigns that include a video raise an average of 114% more than campaigns without videos.
Step 7: Prepare Before Your Campaign
Preparation is key. For a campaign to succeed, it essential that you determine who your personal network donors might be, how you will write and present your story, what your visuals will look like, and what your goals are. People will be hesitant to invest in your campaign if you “have an idea” and want money – many times, you need a prototype, a business plan, and even sales numbers (if possible) for people to invest in your company.
Step 8: Be Realistic and Honest
To launch a successful campaign from the start, it is crucial that you are realistic and honest with both yourself and your audience. Begin by outlining why and what you need money for – this will help you attain your goals and increase your funding. It is also important to understand that investors will avoid the arbitrary, opting instead for specifics. Simply needing “money to grow” is not an effective or legitimate way to fundraise. In short, realism and honesty will help shape your needs and show your audience an achievable goal that they can get behind.
Step 9: Create a Sense of Urgency
The average campaign on Indiegogo lasts for 45 days and reaches its target in 37 days. While these windows seem short, your target market will usually have more than enough time to make a contribution. To ensure that people actually contribute, it is critical that you create a sense of urgency. Creating a sense of urgency will prompt people to take action, and help you reach your goals faster.
Step 10: Start Campaign With 30% Funding
Before you begin your campaign, tap into your personal networks. Use friends and family to jumpstart your campaign, and aim to raise 30% of your capital from these people first. In doing so, you will legitimize your campaign in the eyes of your audience. Once you have raised your initial funds, begin your media campaign. Launching your media campaign prior to receiving funds from friends and family will generate traffic for a page that has little or no investments, and many times people will view your campaign as unsuccessful.
The Challenges of Crowdfunding
While crowdfunding presents a tremendous opportunity for many small business owners in need of financing, it does not come without its challenges, including:
- Timing – Timing can be crucial. During the holiday seasons, money is usually earmarked for other expenses. Investing also tends to be slow during the summer. Unless your company is a nonprofit, tax season might prove a difficult time to get people to donate. Think about these factors and others when deciding when would be the best time to launch your crowdfunding campaign.
- Exhaustion – With so many different platforms and campaigns in today’s crowdfunding landscape, lenders can become overwhelmed and even exhausted with the number of lending opportunities.
- Tax Implications – It is important to understand that any contributions you receive are taxable. Furthermore, any incentives you offer can be subject to taxation from the IRS.
- Competition – Hundreds of platforms and thousands of campaigns can make it hard for your idea to stand out.
- Relationships – Don’t forget about the contributors! Even if you have hundreds of investors, maintaining relationships (i.e. providing updates) is crucial, but also can be time consuming and energy depleting.
Other Types of Lending
Alternative loans cover a broad array of business loan options available to start-ups and existing businesses that fall outside of a traditional bank loan. Alternative loans are currently in high demand as some businesses have found it difficult to get funding through traditional lenders, and alternative lending has emerged as a large player in the financial market due to technological advancements online.
Crowdfunding is just one of the many alternative loan options available to business owners. Other types of alternative loans include online lending, merchant cash advance, factoring, and revenue-based loans. These options cater directly to small business owners and are usually more flexible than larger financial institutions on loan repayments (many offer flexible schedules, for example) and often green light loan approvals much faster than banks, sometimes within 24-48 hours of the loan application. With speed, convenience, and flexibility as selling points, alternative loans are among the fastest-growing financial tools for small businesses available today.
Traditional loans, on the other hand, are more appropriate for your business if you are seeking a larger sum of money. A small business typically cannot get a traditional bank loan if it has been in business for less than 2 years or is asking for less than $250,000. However, traditional bank loans can be beneficial to companies who can get them, as they tend to have lower interest rates, offer tax benefits, and allow you full ownership of your company (as opposed to venture capital).