Sometimes it seems like finding the capital to fund a startup is impossible. Banks are rarely willing to take the risk on entrepreneurs, and nobody has enough money to fund a business project out of pocket. This conundrum often steers up-and-coming business owners to alternative financing methods. One such method that has been that has become increasingly popular is crowdfunding.
What is Crowdfunding?
As some businesses struggle to launch or stay afloat, more and more are looking into crowdfunding as a way of infusing their businesses with new capital. Crowdfunding is defined as the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.
Instead of traditional investors, crowdfunding campaigns are backed by the general public. Crowdfunding for small business provides opportunities for owners to show-off their business ideas to a large audience. For the successful projects, initial funding usually comes from close connections including family, friends, colleagues or anyone the business owner is connected to. Between 25-40% of revenue is derived from first, second and third degree connections. Once a project gains some notoriety, unrelated funders may begin to jump on board to support the projects they deem worthy. Investors pledge a minimum sum and often receive a reward for their involvement.
But crowdfunding is more than simply creating a profile and sending your link to friends and family—businesses must demonstrate a greater purpose to their venture in order to garner support and appeal to outside backers. Unfortunately, most businesses won’t receive the funding they need. In fact, it’s not uncommon for crowdfunding sources to reject the overwhelming majority of applicants due to the fact that they may not be smart investments.
Of course, there are ways to increase your odds. A visually enticing page and project pitch is the first step to attracting potential funders. But, it goes without saying that the best way to improve your chances of landing funding is to possess a smart business idea that resonates with people.
To determine if crowdfunding is beneficial to your startup, let’s take a look at some of the perks it could provide to your business. For those who have a creative business pitch and a strong social media presence, crowdfunding is a fast and effortless way to get funding to cover startup costs. Aspiring entrepreneurs can easily reach out to a vast number of people asking for a small investment. In return, small business owners can offer promotional deals, gifts or future dividends in return.
Crowdfunding is more effective than traditional fundraising: Traditional fundraising for startups takes a lot of time and effort. With crowdfunding, if you choose the right platform, it’s easy to set up a profile and tell your story while asking for a small investment. Once you have your profile completed with all of your information, it will serve as a centralized location that you can easily promote via social media for potential funders to find you.
Crowdfunding proves a business’s trustworthiness: A successful crowdfunding campaign shows people who come across your profile that others believe in your venture and support your business idea. Social proof serves as validation to potential investors and is an invaluable asset.
Crowdfunding provides brainstorming ideas: Engaging the public through crowdsourcing can bring on helpful questions, concerns and ideas to make your business venture better. Customer feedback is important when creating your product or service.
Crowdfunding creates a loyal following: The people who are investing in your business through crowdsourcing believe in your product or service. Ask your early brand advocates to share your crowdfunding profile on their social media pages and with their family and friends to gain more visibility.
Crowdfunding helps you gain exposure: It’s important to take your crowdfunding profile outside of your immediate family and friends. Reach out to local news media and request a blog or news story write-up about your business venture. A feature story or even just a Twitter mention from the media will put more eyes on your business idea.
The Disadvantages of Crowdfunding
While crowdfunding can be a very appealing system of alternative finance, it also has its downsides. While it can propel a few business startups to instant success, the majority will still struggle out of the gate. Some common disadvantages include:
Inability to give back: If you offered something back to your investors such as promotional discounts or dividends, it can get difficult to make good on your promises. You most likely drew funds from not-so-save investors who can be difficult to work with.
Negative impact on future financing options: Crowdfunding may seem like a good idea in the beginning when your need to fund your startup, but if it does take off, future investors may be anxious to invest in a business that is partially owned by inexperienced shareholders.
Slow return: If the business owner needs cash fast to fund his startup, crowdfunding may not be the answer. While it’s easy to set up the crowdfunding profile, it may take time for it to catch media attention and be shared through friends and family.
Potential lawsuits: Lawsuits can arise from failed business ventures if the company is not generating profits. As a new business owner, you may not be able to afford complaints or government investigations into your new business.
Crowdfunding is not for everyone. It’s necessary to research all of your options when looking for funding for your startup and evaluate what’s best for you. If you do proceed with crowdfunding for your small business, treat it as any other form of funding and have a solid business plan and the resources to deliver on your promises.
What Are Some Top Crowdfunding Websites?
There are a number of trusted platforms when it comes to creating your campaign. These crowdfunding platforms allow you to create a profile, choose whether you may want fixed or flexible funding options and suggest ways to market and promote your campaign. They also offer analytics to track your campaigns success. Some of the best crowdfunding sites include:
Tips for a Successful Crowdfunding Campaign
After researching, if you decide that crowdfunding is the right financing option for your startup, there are some steps you can take to launch a successful crowdfunding campaign.
1. Develop your story: Potential investors want to know about your story and why you’re passionate about this product or service. Why did you begin this business venture and how did you turn this idea into a reality? Be sure to include your story in your campaign profile.
2. Use photos and videos in your campaign: Presentation is key. Product photos and videos will help potential investors visualize the product and imagine themselves using it. It’s worth it to spend the extra money on professional photographers to ensure a professional look.
3. Connect your website to your profile: In addition to your crowdfunding profile, it’s a good idea to have a website up and running for anyone who may want to check it out. A web presence proves you’re a legitimate company, which is a positive aspect for investors. Even if it’s a simple landing page, a professional website can help broaden your reach.
4. Know your goals: Review your finances and know exactly how much money you need to raise to meet your goals.
5. Crowdfunding PR: Spread the word about your crowdfunding campaign by gaining media attention. As stated earlier, asking for a short blog or a Twitter mention can go a long way.
6. Know the rules of the crowdfunding site: The guidelines of crowdfunding sites may vary, but be sure to do your research so that your campaign meets the criteria to get approved. Not all campaigns are accepted right away so submit a few days in advance and be prepared to make any changes that may be required.
For a select few, crowdfunding can be a great way to fund a small business. Be sure to create a profile that tells your story and effectively market your business idea as a benefit that is necessary for your target customers. Do your research and follow our list of tips for a successful campaign. If you’ve decided that crowdfunding may not be for you, don’t worry. For the bulk of businesses – bank loans, credit cards and alternative lending options like invoice factoring remain a more viable option.