Crowdfunding has become an increasingly common way to get funding. And for good reason. This is especially true among small businesses which often struggle to get funding.
When considering giving crowdfunding a go as a small business, there are several things to consider.
What are your goals and strategy? What type of crowdfunding do you want to get into and what can you offer your backers? Which platform should you use? Each type of crowdfunding and each platform has its own pros and cons, so it’s all about what is most suitable for your business.
In this guide, we’ll go through the benefits that crowdfunding can bring to your business as well as some of the things you should be aware of.
Crowdfunding allows people to see both your current products and the ones you plan to offer. Backers will only be attracted by ideas or people they believe in, meaning that if you manage to get crowdfunded you are not the only one to recognise the potential of your idea. It’s a great sign that you might be going in the right direction. Companies that attract attention from backers often attract attention from customers and future investors as well.
Furthermore, you can also gather valuable information about your future customers, as it allows you to get feedback from your audience about what they like or dislike about your product. Crowdfunding creates a test environment for the research and development of your product. All while you are getting funded. Not bad.
One reason to choose crowdfunding over traditional loans and investments is the financial institutions themselves. For example, it can be easier to run a successful crowdfunding campaign than getting a bank loan.
The formal requirements asked by banks to get a loan are often very hard to reach for startups. In this context, starting a crowdfunding campaign opens new possibilities for small businesses, as people often invest for more reasons than financial gain:
They might think the problem you are solving is worth it. They might feel good helping someone get off the ground. Or they might just believe in you as a person. The reasons can be endless, but they are often much less calculated than if you ask
Crowdfunding provides a lot of information that can help you build and scale your business.
The feedback that you receive from your audience can assist you in your decision-making. Listening to your backers will help you adjust your work to fit the needs of your market.
Additionally, crowdfunding can allow pre-orders of your products. This helps you decide on whether to start an actual production and you can adjust your production schedule to avoid supply issues and delays.
A general idea of how much you will sell allows you to better plan production. This can mean better deals and lower storage costs.
Crowdfunding means interacting with, well, a crowd. This means that your whole campaign, while providing you with funding, also doubles as a great way to advertise your idea to your audience. If you have 500 backers who are all talking about your campaign, you already are on the way to having a strong brand presence.
It also provides you with a solid base of early adopters and brand advocates. Many of your backers will have an interest in you succeeding, so you will already have a bunch of ambassadors promoting your campaign and product to the (hopefully) right people.
With a strong communication and PR plan, your campaign might even get picked up by the press or other media. Everyone likes a good crowdfunding story. A solid press release and proper marketing can possibly net you the attention of news outlets with large audiences.
Lastly, few things are as effective as social proof. We are social by nature. If other people believe in you, more will follow. Having a large group of backers put their trust and money in you is a great way to get others to believe in and support your idea.
Reward-based crowdfunding is exactly what it says on the tin: backers get a reward for the money they invest. It often uses a tier-based system to assign different rewards based on the investment. A higher investment means a higher tier and thus better rewards.
Reward crowdfunding is a perfect way to create a buzz about your product and is a great solution for new businesses that are just starting out.
You don’t need to meet requirements from investors or loan lenders – all you need is an idea that the crowd will find interesting or useful. You won’t have to pay interest rates and you’ll have full ownership of the company. All you need to do is to pay for the production and shipment of the rewards and commission to the crowdfunding platform.
If you decide to rely on reward crowdfunding, you should also be aware of some of the risks you may encounter.
Reward crowdfunding is mainly useful for business-to-consumer products. This way you can raise money to produce your brilliant new gadget and sell it at the same time. Companies that produce business-to-business solutions have a harder time with reward crowdfunding, as their core product isn’t easily sellable to the normal crowdfunding backer. It can of course be done, but then you need to be creative in deciding on which rewards to offer.
A lot of platforms use the all-or-nothing model, which means that if your campaign doesn’t reach your goal you won’t receive anything at all. You can also risk the opposite: if you exceed the expected donations, you may not be able to supply the demand. If your backers don’t get what they paid for on time, you’ll be off to a bad start. So make sure you plan your campaign carefully in advance.
This is the crowdfunding model that is closest to traditional startup funding: You sell a part of your company to investors to get funding.
The companies best suited for equity crowdfunding are often the ones that already enjoy some success. If your product has proved its appeal and you want to expand further, equity crowdfunding could be the way to go.
You also don’t need to worry about delivering your product to backers. Instead, you get a sum of money and then it is up to you to lead your business to success. Just like what you would do with a traditional investment by a venture fund or an angel investor.
Furthermore, equity crowdfunding lets you access a wide pool of investors. These investors are typically ordinary people who genuinely care about you and your business. They see it as more than a financial investment. It might also make them likely to stick with you as well as invest in other ventures you might have.
When you sell shares, you give a part of your company to your investors. This naturally carries some implications. For example, you will have to live up to the expectations of your stakeholders.
You usually have to publish your financial information and business plan. Not everyone is comfortable having someone looking over their shoulder in this way.
Let’s say you want to run a crowdfunding campaign, but you don’t want to sell shares of your company and you don’t have the perfect consumer-good to sell on a reward crowdfunding platform. Then debt-based crowdfunding, also known as crowdlending or peer-to-peer lending could be the way to go.
In debt-based crowdfunding, backers lend money to your company. Simple as that. You will of course have to return the money in the future, usually with interests added. In this way it functions the same as a bank loan. Usually this type of crowdfunding is best suited for established companies with existing customers. If your potential investors believe in the stability of your business, it is easier to get them to invest.
Of course, you need a steady flow of revenue if you are to pay off the loan. If you feel like your business is already solid and you have confidence in your ability to pay off the loan with interests, then debt crowdfunding is a great option.
The platforms that regulate debt-based campaigns assess the creditworthiness of the companies. So you need to have your finances in order. Just like a bank loan, if your credit rating is horrible, the same will go for your crowdfunding chances. If your rating is deemed too low, your project will never even make it onto the platform.
In this type of crowdfunding, the investors donate money to you without expecting anything in return. As a result, the company, organization, or person running the campaign needs to have an appealing cause.
As such, the subjects of these campaigns are often charitable projects or individuals. Whether it’s disaster relief, covering medical bills, or opportunities for children, the cause is the most important part of donation crowdfunding.
So the main users of donation-based crowdfunding are often private individuals, charities, social enterprises or other NGOs.
You might have a great product that can make the lives of people easier. Or a service that is innovative and can make a difference in the world. In this case, you might be able to convince enough people to support you without getting anything in return.
When making use of the donation-based crowdfunding model, you are not offering anything in return. This means that you are likely to have to work a lot harder on convincing people to back your project.
Getting a share of your company or earning interest on a loan are strong incentives for backers. Arguing for people to give away money for free means that you need to have a strong message and work hard on getting people interested in that message.
Careful planning will play an important role in your crowdfunding campaign. If you want it to be a success and reduce the risk of wasting time and money, you have to focus on the details.
The first step is to choose the form of crowdfunding that would help your business the most. If you are a small retailer, you may want to advertise your product as much as possible. In this case, reward crowdfunding would be a great choice. But if you develop complex IT solutions for the B2B market, you may prefer equity or debt based crowdfunding. It all depends on your circumstances and what you want to achieve.
You need to set your crowdfunding goals. How much money do you want to raise and what is your ambition for your company or product? Most platforms use an all-or-nothing approach, so you should be careful not to aim too high to begin with.
You also have to decide whether it is a good idea to exceed your goals or not. In the case of reward crowdfunding for example, exceeding your goals can overload your production. This will result in delays or failures in providing the rewards. So make sure you only ask for what you need.
In donation crowdfunding, if you ask for too much, it can be seen as unnecessary and might deter some of your backers from contributing.
You need to address your crowd in the best way possible if you want them to invest in you. Which means focusing on what’s important for them.
A reward based campaign needs to be catchy and attractive. The rewards you offer must interest the community who are going to buy them.
A donation-based campaign should highlight its value and social impact to get attention. Even if you support an important cause, it doesn’t matter if you can’t highlight that fact.
If you want to run a debt or equity crowdfunding campaign, focus on reliability and positive future prospects.
The audience of each type of crowdfunding has different interests. You need to take that into consideration when designing your campaign.
No matter your ambition, crowdfunding is a great way to get the necessary funding to realise it. It all comes down to your ability to find and use the right methods, as well as making the most of the benefits that crowdfunding offers. If you can do that, crowdfunding presents a great way to explore and develop the potential of your idea.