Understanding Crowdfunding

The options available to small business owners, particularly startups, for finding capital are better than ever—but they might not be where you’re looking. Crowdfunding is one of those options. And, while it’s not a small business loan, it could be a great option for a startup business or an established business trying to launch and validate a new product idea.

What is Crowdfunding?

Crowdfunding is the process of organizing a group of people to contribute relatively small amounts of capital individually towards a larger goal, such as launching a new business or taking a new product to market. The transactions take place on the Internet on crowdfunding platforms. Each platform has its own requirements and restrictions so you’ll want to make sure you read the fine print, but here is some general information you’ll need to know before you launch your first campaign:

1. Crowdfunding takes place online at a portal (or website): As a business owner, you visit one of many crowdfunding sites like Kickstarter or Indiegogo, submit your idea, and pitch the “crowd” to participate. If the crowd likes your idea and you are successful at motivating them, they all contribute a small amount of money to achieve your larger goal. This is referred to as creating a campaign.
2. There are two types of crowdfunding: They are gift- or premium-based crowdfunding and investment crowdfunding. The former involves offering some kind of gift, acknowledgment, premium, or early access to a new product in exchange for a donation to your campaign. The later, is an investment for a small percentage of equity. Investment crowdfunding is the newer of the two and currently requires the investor be as, an “accredited” investor. The type of crowdfunding campaign you choose will depend upon the nature of your idea, whether or not you want to offer investors small pieces of equity, and the amount of capital you need to raise.
3. It’s not magic: The basic principles behind crowdfunding are pretty simple and straightforward, but a successful crowdfunding campaign isn’t as simple as posting your idea online and watching thousands of people start contributing. You’ll need to craft a very persuasive pitch, present it in a compelling way, and likely need to pre-seed your non-investment campaign with pledges from friends, family, and others in your personal network to get the ball rolling.
4. It can work for both startups and established businesses: While crowdfunding can be a good way for a startup to find capital, established businesses can also turn to the crowd to fund a new product or validate a new idea. Crowdfunding allows you to put your idea in front of potential customers that might not otherwise be aware of your business—your level of response may help you evaluate whether or not your new product would do well in the marketplace.
5. It’s available to both young and older entrepreneurs: While the technology is fairly new and has been embraced by a lot of younger entrepreneurs, it’s all about energizing people around a good idea. What’s more, there are a lot of seasoned entrepreneurs who are finding great success crowdfunding.
6. It’s not just for those who can’t qualify for a traditional small business loan: Although it is a good option for business owners who might not have a long enough track record to qualify for a loan, that’s not the only reason many entrepreneurs are choosing crowdfunding. The ability to get your idea in front of thousands of people who might not otherwise know about you or your business idea can sometimes provide “instant” customers once you go live. A successful campaign may also attract the attention of future angel and venture capital investors.

Is Crowdfunding Right For My Business?

Crowdfunding can be a viable option for many small business owners and is one of the few options available to business owners who don’t have an established track record or several years in business. If done correctly, a campaign can introduce your new business or product idea to potential customers who may have never heard of you before. Be sure to consult an adviser if you choose to pursue an investment-based crowdfunding campaign since these will be governed by important securities laws and rules.

Running a successful non-investment campaign, however, is more than just posting your idea on a crowdfunding platform and waiting for backers to jump on board.

1. Think strategically: Reach out to your network; explain your campaign, and the specific date/time it will go live. Try to generate as much pre-launch hype within your network as you can. Make sure you have a schedule for social media promotion to increase campaign reach and create awareness. The goal is to start the campaign with as much momentum as possible.
2. Ask your network for pre-pledges: The most successful crowdfunding campaigns have 20 to 30 percent of their funding secured before they publicly launch the campaign. This strategy encourages others to pledge when they see a lot of others already involved.
3. Reach out to your professional network: Leverage any contacts you have in the news media or social media to talk about your campaign and point people there. A friend with a lot of Twitter followers or someone in the news media can help create a lot of awareness for your campaign.
4. Test your rewards: Are your rewards for donating enticing enough to get people to act on your campaign now, instead of putting it off?
5. Stay on top of your campaign: The more time you put into promoting your campaign, the more attention you’ll gain and the more potential money you’ll get. Your energy will attract others who will want to participate.

If you’re willing to commit to this level of effort, crowdfunding could be right for you.

In addition to raising capital, crowdfunding is a great way to validate a new product or idea. If your campaign falls flat and doesn’t meet it’s financial objectives with your potential audience, you can go back to the drawing board. It allows you to get in front of thousands of people you might not otherwise meet and create a network of potential customers and backers.

Be aware, there are no guarantees. You might not reach your goals and some platforms take an all-or-nothing approach to pledges. Don’t be overly optimistic when setting your goals because if you don’t hit them, you might not get anything.