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Crowdfunding involves getting business capital by gathering many backers’ small contributions online. While these contributions are sometimes donated, contributors may also exchange their investments for company equity or other rewards.
Crowdfunding harnesses public interest and engages small investors with interest in a specific business or project. Before trying it for your business, learn about the benefits, hazards and regulations unique to this fundraising method.
What is crowdfunding?
Crowdfunding involves a fundraising campaign, which is typically time-limited. The fundraising business publicizes its efforts and requests contributions for startup costs or a specific project.
There are websites specifically for these types of campaigns. While crowdfunding websites take a percentage of the money raised as a fee, crowdfunding donations don’t have to be repaid like a loan.
Crowdfunding companies will often take on some (or all) of the vetting requirements for investors, conducting due diligence on the company’s financials, licensure and business planning. Platforms also host a space for fundraisers to publicize their projects, making multimedia and social media sharing easy.
Getting access to contributions may be an “all-or-nothing” gamble, according to Candid Learning, an educational platform focused on philanthropy. Some platforms only send you the funds if your campaign reaches its goal by the time it ends.
“Less than half of all crowdfunding campaigns reach their goals,” the organization advises, cautioning readers to educate themselves about a platform’s fine print, guidelines and restrictions before committing to an agreement.
Types of crowdfunding
Before launching a campaign, you must decide which crowdfunding type your company plans to pursue. There are four common types of crowdfunding.
You’ve likely seen donation-based crowdfunding campaigns on social media. These campaigns commonly support charitable causes, such as helping with someone’s medical bills or replacing a family’s property after a natural disaster.
The popular platform GoFundMe allows individuals and community nonprofits to raise donated funds this way.
Some businesses will seek donations through crowdfunding, especially if there is a strong local interest in the product or cause. These crowdfunding efforts do not provide anything in exchange for donated funds, and donations are typically comprised of many small contributions (as low as a few dollars per person, in some cases).
Debt-based crowdfunding operates like getting business loans from multiple lenders. Contributors will commit a certain amount with the expectation that the fundraiser will pay back the funds — usually plus interest — within an established time frame.
Microloan platform Kiva works this way, with the added twist that loans are interest-free.
Reward crowdfunding is popular on Kickstarter, which hosts creative ideas and products. These crowdfunding projects offer contributors rewards at different giving thresholds — commonly a digital badge or sticker for smaller contributions and a tote bag or t-shirt at the next level up.
Top-tier rewards for major contributors to these campaigns can be lavish: Trips, celebrity meet-and-greets or free or early-release products.
Equity crowdfunding is a standard business model for entrepreneurs looking to fund startup or investment costs. This type of crowdfunding exchanges short- or long-term equity in the project or company in exchange for an investor’s initial contribution.
As with all crowdfunding, participants in this model run a risk — in this case, the possibility that their chosen venture may not gain value in the future. This type of crowdfunding is regulated by the U.S. Securities and Exchanges Commission.
Popular crowdfunding platforms for businesses
There are many options for new and established companies looking to source crowdfunding. These include:
- Kickstarter: This is a reward-based platform for creative concepts. Small businesses may use Kickstarter to raise money for projects like an innovative small appliance or an independent film.
- Indiegogo: This crowdfunding site is geared toward elevating technology projects. Past campaigns have included hovering cameras and e-bike accessories.
- SeedInvest: This is a popular site for startups looking to gain traction and funds. The site was recently acquired by StartEngine.
Limiting your campaigns to a certain time frame can help drive momentum and create a fear of missing out that compels investors. Not all crowdfunding efforts are time-limited, though.
One ongoing crowdfunding host is Patreon, where creatives and content creators can build committed memberships of supporters. These supporters pay a monthly subscription fee in exchange for exclusive content and access to their favorite creators.
How to crowdfund for a business
1. Clarify your idea and audience
The first step toward success is to decide what you’re asking contributors to fund and what audience you’ll be asking. If you’re looking to crowdfund a specific investment or project, is it something for which you’ll source broad contributions?
Knowing whether you plan to pitch to local community members or like-minded entrepreneurs worldwide will inform your campaign’s style and goals. At this stage of the planning process, you want to conduct market research to assess your competition.
2. Decide on your goals and timeline
Next, decide how much funding you will need to raise to make the project — whether that’s producing a certain product or buying a storefront — a success.
Realistically, how long will you need to publicize your campaign and raise the money? Also, consider how long is too long for potential backers to wait if they commit early in the campaign. According to research from the funding platform Kickstarter, campaigns typically perform best when the duration is around 30 days.
At this stage of the planning process, you may consider what type of crowdfunding best suits your business needs.
3. Choose a host platform
After researching which platforms host projects similar to yours, be sure to comb user agreements and fine print before selecting a host site.
Different platforms will have different guidelines and requirements regarding project type, funding timeframes and what happens if you do not reach your full fundraising goal. Fees also vary by platform.
4. Tailor and share your story
The most successful crowdfunding projects have a strong narrative behind them. Be sure to enlist the help of talented storytellers throughout your campaign. The more you can compel possible investors through background information, foundational research, and appealing multimedia content, the more likely you will reach your fundraising goals.
5. Wrap your campaign and follow up with contributors
Once you’ve ended your fundraising campaign, follow up with those who have stepped in to contribute. Whether you reach your goal or not, these investors will want to know what happens with the project next. If you promised backer rewards, deliver them in a timely manner to avoid souring your company’s reputation.
Keep good records of who contributed and at what level. Leverage the relationships you build for future business.
Pros and cons of crowdfunding for small businesses
Crowdfunding carries unique pros and cons for business owners.
|Allows you to reach investors of all backgrounds, from neighbors to venture capital firms.||Funds may not be available unless you reach the full campaign goal.|
|Uses the internet and social media to amplify an idea, which can boost a project that may otherwise have limited reach.||Fundraising platforms and investors may take a percentage of the money raised.|
|Gives businesses access to a funding source that doesn’t need to be paid back dollar-for-dollar.||Can take months to reach your goal, all while requiring unpaid marketing efforts to spread the word about the campaign.|
Alternatives to crowdfunding
If you don’t have the time to run a crowdfunding campaign without guaranteed results, there are some alternative lending products worth considering. These options include both money that needs to be repaid and funds that are yours to keep.
- Grants: You may find small business grants for your industry at both local and federal levels of government. Grants must be applied for — and there will be a wait time — but the money doesn’t need to be paid back.
- Business credit cards: Like personal credit cards, business cards offer a revolving line of credit. Business credit cards can have an introductory interest rate or other rewards and perks. Additionally, if you don’t carry a monthly balance, you won’t be charged interest.
- Business lines of credit: A line of credit is also revolving, but it operates similarly to a loan. You’ll apply through a traditional bank or online lender who will deposit money into your account when you request a draw.
- Loans: Startup business loans are also a good option for new businesses. Some lenders only require a few months in operation to qualify. Business loans are dispersed in one lump sum to give you an instant boost in cash flow.
The bottom line
Crowdfunding can be an innovative and attention-grabbing way to garner fast support for your business or latest idea. Be sure to do your homework on the front end, ensuring your effort is unique enough from any potential competition. You will also want to research your hosting platform to ensure a good fit and your funding goals to ensure they are realistic and worth the effort.
Frequently asked questions about small business crowdfunding
Crowdfunding involves raising money from a broad base of investors, typically through the internet. Donors are often driven by some level of financial or personal investment in the project.
Companies using equity-based fundraising can raise an aggregate of $5 million over a 12-month period through Regulation Crowdfunding. Per the Securities and Exchange Commission (SEC), different limitations apply to various kinds of investors.
Be sure the goal for your crowdfunding project covers the total cost of your effort and any fees or commissions your funding platform charges at the end of your campaign.
You may need to pay back crowdfunded contributions, depending on what kind of campaign you run. Donation-based crowdfunding usually operates without contributors expecting repayment; debt-based crowdfunding projects assume future repayment plus interest.