Crowdfunding has been a buzzword since President Obama signed the Jumpstart Our Business Startup (JOBS) Act in 2012. This bill was a game-changer for startups, allowing them to turn to online investors to raise the coveted capital they needed to turn an idea into a reality. With crowdfunding platforms such as Kickstarter, Indiegogo, and Crowdfunder hitting the market, entrepreneurs now have a viable alternative to borrowing money from family and friends, maxing out credit cards, or taking out traditional loans.
What Is Crowdfunding?
If you haven’t heard of crowdfunding or don’t quite know how it works, learn the basics of this form of financing before diving in. Crowdfunding is essentially a fundraising method that takes contributions from the masses (the “crowd”) to fund a business, often in exchange for some kind of reward. We’ll get into the reward aspect later. Basically, an aspiring business owner takes to the internet with an idea and tries to entice thousands of people to give small contributions—thus funding the startup.
Crowdfunding is more efficient than traditional fundraising, requiring less time and attention. The benefits of crowdfunding are numerous, with the most obvious perk being that you typically don’t have to repay the capital you receive. However, this doesn’t mean the money is exactly free. Business owners have to put tons of work into crowdfunding to be successful. Launching a startup via crowdfunding isn’t easy, but it can provide immense returns to entrepreneurs who take the time and effort to make it work.
Understand the Four Types of Crowdfunding
Each site runs off a certain form of crowdfunding, managing the investor-project owner relationship differently depending on the stipulations of the contribution. There are four main types of crowdfunding sites:
- Equity-based. These sites reward investors with a stake in the company. These sites get a high volume of investors, but business owners must be careful since each investor becomes a stakeholder.
- Donation-based. The contributions on these sites are often tax-deductible and must be spent on a specific cause that the business owner has advertised.
- Lending-based. On these sites, the business owner must eventually repay investors for their contributions, sometimes with interest tacked on.
- Rewards-based. Business owners promise a reward in exchange for an investor’s contribution, such as free product samples or pre-ordering capabilities.
Research each platform type thoroughly before deciding which is best for your business. Make your decision based on what stage your business is in and your industry. Read testimonials of business owners who have used a site and weigh your options carefully. What works for one of your competitors may not be the right platform for you.
Choose a Platform
Once you understand the basic types of platforms, you can make an educated decision about which one to use. There are many to choose from, with more cropping up as crowdfunding gains popularity. Understand the pros and cons of each platform, what percentage of each contribution they keep, and read testimonials to make an informed decision about which platform is best for you. Here are a few of the top crowdfunding sites of 2016 according to a Consumer Affairs report:
- The users on this platform raise about $4 million every day collectively. GoFundMe doesn’t impose project deadlines or fundraising goals and has handy management tools to track campaign performance metrics. It’s best for individuals raising money for personal reasons but can also work for business reasons.
- Indiegogo. This was the world’s first crowdfunding platform, established in 2008. It enables projects to move quickly from concept to market, backed by a community that believes the world benefits when ideas get an equal chance at success. Indiegogo helps businesses every step of the way, enabling specialized campaigns and customer support.
- Kickstarter. This platform gave success to many now well-known products, including Pebble Technology watches, Coolest Cooler, and PonoMusic. Its “all or nothing” philosophy minimizes donor risk, therefore encouraging more donations. Kickstarter is known for funding creative projects across the dance, food, music, and gaming industries.
- Crowdfunder. This platform connects entrepreneurs with a large number of active investors. It allows business owners to keep deals public or private and provides real-time results for each campaign.
- CircleUp. This is an equity-based platform that focuses on consumer and retail investing. It holds high standards for the companies that fundraise on the website, typically only including those with at least $1 million in revenue for the current year. The specialized focus of CircleUp is a benefit for companies in certain industries.
These are just a few on a long list of crowdfunding platforms available for different industries and business needs. Choosing the right platform is incredibly important to the overall success of your crowdfunding venture. Some platforms are geared toward certain industries and are not the best option for everyone. When deciding which to sign up for, consider your business stage, business sector, and the platform’s current track record.
Prepare a Crowdfunding Campaign
Once you choose your platform, it’s time to prepare your crowdfunding campaign. This is the most crucial part of crowdfunding. If investors don’t like your campaign, they won’t invest. First, you must have a firm grasp on what your business is, inside and out. You must have the numbers to support your idea, a solid business plan, and a compelling pitch. State the problem your product or service addresses, and then explain your solution. Tailor your pitch to reach your audience on an emotional and intellectual level for the best investor response.
Write a budget, including a realistic funding goal. Explain where the money is going in detail so investors know exactly what you’ll do with their contributions. The best campaign pitches are videos, so consumers can get to know you, your idea, and your brand before deciding to invest. Your pitch should be clear, concise, and attention grabbing. It should outline your product and explain why it’s worthy of investors’ support.
Once you launch your campaign, make people aware of it. Typical online marketing methods can work to promote your crowdfunding campaign, such as social media advertisements, email marketing, and banner ads. Invite your community to the campaign, and encourage people to share it when they make a donation. Keep in touch with supporters, giving them updates on your campaign’s progress to keep them interested in your brand.
Keep Backers Interested
Crowdfunding is only as successful as the weight of your influence with your target audience. Getting a crowd interested enough in your product or service to put in their own money can be difficult and won’t happen overnight. However, if you keep at it, you’ll probably succeed. Reward investors with videos, tangible promotional items, discounts on future purchases, and by putting their names on your website. If you aren’t producing your item yet, you can still offer T-shirts and other items with your brand’s logo printed on them.
Stick With It
Thanks to the viral nature of the internet, your idea may strike a chord with millions of eager investors and catapult you to wild success overnight. However, it’s most likely that your crowdfunding campaign will slowly but surely give you the funding needed to start your business.
Crowdfunding won’t necessarily give you instant funds like a bank loan or factor funding, but it offers many other benefits to those willing to see it through. Be patient with your crowdfunding campaign and remind yourself of a core belief in entrepreneurship: anything is possible.
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