If the banks are shutting you out with their long list of requirements, and you seem to be going crazy because the angels and venture capitalists you approached are rejecting your offer, then crowdfunding might be the perfect alternative for you.
In this chapter, you will learn about crowdfunding as a small business financing option and how to use it to raise capital for your business.
What is crowdfunding?
Crowdfunding is a collective effort of individuals who network and pool their money, usually via the internet, to support a business or some other cause initiated by an individual or organization. In other words, crowdfunding is an arrangement in which a “crowd” of people collectively raise the amount of money needed to support a project.
There are two major forms of crowdfunding:
- Donation crowdfunding
- Business crowdfunding
In donation crowdfunding, people contribute their money to a cause they believe in, without necessarily expecting any reward, such as raising money to acquire relief materials for those hit by a natural disaster. The only reward that contributors get is a feeling of satisfaction about helping the project.
Business crowdfunding—this is the type we are really concerned with in this chapter. It involves collective contribution of the funds needed to start a new business or expand an existing one. In this type of crowdfunding, investors support your business with their money but with the aim of getting some reward in the end.
This reward could be interest that you must pay back along with their investment (debt crowdfunding), some shares in your business (equity crowdfunding), or your product once it’s made available. Overall, crowdfunding can be a smart way to raise money for your business, as it enables you to tap into the masses for the funds you need.
How does business crowdfunding work?
Well, crowdfunding works this way. You, the entrepreneur, will post a description of your business, an outline of your business plan, and the amount of capital you need on an online crowdfunding platform (or another suitable online medium).
You will also explain what contributors (investors) will receive in return; be it some shares in your business or cash repayment along with interest. If you are running a retail business, you can offer your product in return for the funds provided by contributors, this is crowdfunding by pre-ordering. (For example, if you are starting a bakery business, you can offer to deliver gourmet cupcakes to each contributor for the first 10 Fridays after business launch).
After posting all the above on the crowdfunding website, you will state the amount of time for which contributions are welcome. Then you will wait for interested investors to start pledging their monies. During the contribution process, the crowdfunding service handles all the funds as well as other necessary arrangements. And once the period for accepting contributions is over, the funds realized during your crowdfunding campaign will be released to you.
In case you fail to meet your funding target, the crowdfunding service either returns the funds (which has previously been held in escrow) to the contributors or hands them over to you (with the expectation that you will find other means to complete the needed capital).
19 Questions you must answer before staging your crowdfunding campaign
Although crowdfunding work for many startups and existing businesses as a means of sourcing capital, it is not for everyone. To be sure that crowdfunding is suitable for your business and the right step to take at this time, you must provide convincing and satisfactory answers to the following questions:
- How good is your business idea? Are you sure that people will be interested in it?
- Why do you think your product or service will sell? What value exactly does it offer the customer?
- What makes your offer different from previously existing ones? Are you sure this difference will give it an edge in the market?
- Can you express your idea in a simple way and at the same time get people excited about it?
- Do you have something tangible to show when presenting your product or service, like a proof that people can visualize?
- How well do you know and understand your target audience?
- Have you really calculated how much money you will need to launch your business and get it running?
- Are you very confident in your ability to reach out to and connect with potential contributors?
- Have you planned which media you will use to reach out to and connect with them?
- Have you considered all financial variables, such as the costs of reward fulfillment, payments to the crowdfunding service, and taxes?
- Are you sure you can fulfill all your promises, such as launching your business within the specified timeframe and delivering on all the promises in your pitch?
- Have you considered the likely impact on your business’s identity or your own personal brand, should your crowdfunding campaign fail?
- Does your budget allow for breathing room in certain areas, and hidden costs in general?
- Do you have some great rewards in mind to give contributors and incentives to encourage them to donate?
- Have you mapped out a strategy for rewarding contributors? How will you offer these rewards?
- Can you offer meaningful rewards at a variety of investment levels to attract all potential contributors?
- Do you deeply understand all the personal and professional demands that the crowdfunding process demands, and are you prepared to put all your effort into making your campaign a success?
- How will you promote your campaign?
- Have you examined other crowdfunding campaigns—both successes and failures—to understand which approaches, techniques, and strategies work or tend to cause a failure.
Once again, if you can satisfactorily answer these questions with a straight face, and believe with certainty in your ability to deliver on all, there’s a good chance that you can stage a successful crowdfunding campaign.
Top 10 Notable crowdfunding platforms and websites in the United States
While Crowdfunding could be fun, other financing options may be more suitable for your business and easier for you to adopt. So always weigh the costs and efforts required to run a crowdfunding campaign against those required for other options before plunging into it. In fact, it’s better to try other options first; only when they fail should you consider crowdfunding.