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 first entrepreneur reached out to his or her parents for a loan to keep his or her fledging business afloat, the digital age has allowed small business owners to set up crowdfunding campaigns online and forgo big banks, which reject eight out of 10 entrepreneurs, according to +Kiva Zip Program Manager Justin Renfro (featured in Dun & Bradstreet’s Crowdfunding Google+ Hangout below).
Hundreds of online crowdfunding platforms give entrepreneurs a medium 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 continued customers. So, the question is: where do small business owners begin?
How to Get Started
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Thanks to thousands of previously executed campaigns, there is no secret to crowdfunding success, but rather a suggested formula. This formula can be applied to campaigns of all kinds, and entails answering important questions and following pivotal steps, which can be found below:
Step 1: Is 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 give your business money, individuals are interested in getting involved with your campaign and helping make it a reality. However, before your campaign becomes a reality, 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 like a marathon and less like a sprint.
- Is your venture or new idea something people will rally behind in the online universe?
If you answered yes to both of these questions, you are prepared to implement and execute a crowdfunding campaign.
Step 2: Is 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 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; and artists can appeal to niche markets all across the world to gain a following and to raise capital.
While businesses may choose various methods of financing (see Step 3), all crowdfunding campaigns can share one thing in common: they are able to leverage their stories in an attempt to create social capital and use crowdfunding platforms 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 customers. If raising capital is your only goal, consider these alternative or traditional funding options.
The following video explains crowdfunding, highlights its pros and cons, and outlines practices that result in successful campaigns.
Step 3: Which Platform is Most Appropriate for Your Campaign?
There are hundreds of different platforms in today’s crowdfunding landscape, 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.
- Crowdfunder – As an equity crowdfunding platform that sources and funds high growth ventures, crowdfunder positions itself as crowdsourced venture capital, and allows individuals to invest in companies alongside established venture capitalists.
- 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 is 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 – you give your audience perquisites and they give 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 is important to understand the parameters of the law prior to beginning your campaign.
Regardless of your chosen platform and contribution model, you will 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.
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 tremendous 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. This means that you need to know with absolute certainty what your target market is, who 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 is transmitted accurately across all audiences.
It is also imperative that your campaign includes a video. A three-minute video is standard, and necessary if it is supported by the platform. Campaigns that include a video raise an average of 114% more money than campaigns without videos.
Step 7: Prepare Before Your Campaign!
Preparation is key. For a campaign to succeed, it essential that you thoughtfully plan out who your personal network donors will 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 – you need a prototype, a business plan, and even sales (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. 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 what is achievable.
Step 9: Create a Sense of Urgency
The average campaign on Indiegogo lasts for 45 days, and reaches its target in 37. While these windows seem short, your target market will view them as more than enough time to make a contribution. To ensure that people actually make a contribution, 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. 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 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.
- 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. 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 – Do not forget about the contributors! Even though you may 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 larger financial institutions have slowed traditional lending spigots, 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, often 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, as they tend to have lower interest rates, offer tax benefits, and allow you full ownership of your company (as opposed to venture capital). As seen below, these loans can be difficult to obtain for small businesses, though.
Real Life Success Stories
These business owners launched with successful crowdfunding campaigns. Now they’re passing along their tips and strategies to you.