This article is part of a larger series on Business Financing.
Crowdfunding is a financing method that involves providing goods, services or even equity in your company up in exchange for financial backing from investors. Because you’re asking people to pledge financial support to your business, you must explain clearly to potential backers how your business or product will benefit those backers.
Crowdfunding has soared in popularity, especially for individual content creators. Unfortunately, the competition for crowdfunding dollars has increased. Many small businesses choose to crowdfund instead of getting a startup business loan. So you need to have a solid plan, weighing the pros and cons of crowdfunding, before beginning your campaign.
Here are the seven steps you need to take to have the best chance to crowdfund your business successfully.
1. Select Your Crowdfunding Method
The internet is full of crowdfunding websites. Each one has different requirements and different benefits. Depending on what type of business you have and your funding needs, there will be a crowdfunding platform that’s best for both your needs and the desires of potential backers.
Crowdfunding campaigns usually take one of two forms: reward-based or equity-based.
Reward-based crowdfunding offers products or services in exchange for a monthly subscription to the business. Different rewards are available depending on the customer’s contribution level or subscription. The funds must be used for a specific purpose, which is stated at the beginning of the campaign.
Reward-based crowdfunding is ideal for new businesses launching a new product or a business without any revenue. Companies also use this method to gain exposure.
Equity-based crowdfunding allows customers to receive shares of the business due to their contribution and lets startups get the capital needed to grow quickly. However, it’s recommended that a company seek legal advice before raising money through equity-based crowdfunding because it’s very complicated.
There are three types of equity-based crowdfunding:
- Equity I: This must be done privately through accredited investors. Entrepreneurs using this type of crowdfunding get access to the fewest potential investors and deal with the fewest legal regulations.
- Equity II: This allows you to advertise your crowdfunding opportunity publicly, but you can still only accept money from accredited investors.
- Equity III: This lets you publicly advertise your crowdfunding needs and goals, and you can accept funds from just about anyone. This option is heavily regulated by the SEC to protect the interests of inexperienced investors.
Numerous laws and regulations govern equity-based crowdfunding. These laws are in place to protect the interests of investors because many of them are inexperienced with this type of investing.
2. Offer Good Rewards and Communicate With Backers
Because there’s such high competition for crowdfunding dollars, this step may be one of the most important ones in your crowdfunding campaign. You have to give potential investors something they would want to receive. It also helps to have different levels of rewards for backers as they donate higher amounts of money.
Once they have pledged to support your campaign, you need to keep them updated on the progress. If there are delays to the project, communicate them as quickly and clearly as possible. Nobody wants to feel like they contributed to something only to not hear updates for months at a time. You don’t want to make your backers feel ripped off, so keep them informed.
3. Understand the Rules and Guidelines
Every crowdfunding platform will have specific rules and guidelines for campaigns to follow. As stated above, if you’re using equity-based crowdfunding, there are federal guidelines in place to protect investors. You should consult your compliance or legal department for guidance with your crowdfunding campaign throughout the entire process.
4. Time Your Campaign Strategically
Crowdfunding campaigns take a few days to be approved by the platform, so be sure to incorporate that into the timeline of your campaign. In addition, once the campaign has been successful, it’ll take a few days for all of the pledged funds to be received.
You’ll also have to decide how long to keep the campaign active. Reward campaigns that last 40 days or fewer tend to be the most successful. Putting an end date to the campaign makes backers feel an urgency to support sooner instead of feeling like they can procrastinate. Equity campaigns will typically last longer, due to the amount of paperwork and money involved.
5. Spread the Word About Your Campaign and Your Business
It’s not enough to put a crowdfunding campaign up on a website and then assume that people will find it. Before your campaign goes live and during the campaign, it’s critical to spread the word as much as possible. Word of mouth advertising is the best method. This can be done through social media, using Facebook, Twitter, LinkedIn, and other platforms. Using local media to spotlight the campaign can also help its reach. Companies like Kickbooster can also help with word-of-mouth advertising.
It’s just like fishing—the wider net you cast, the more patrons you’ll attract and the better chance your campaign will succeed.
6. Know Your Funding Target
Creating a budget for a crowdfunding campaign can be tricky. The money received isn’t straight profit. Some of that money will go to create, market, sell, and ship your product. Some of the money might offset the cost of rewards given to patrons for supporting your campaign.
These factors are all things to consider when setting a limit. Setting a limit that’s too low can end up leaving you short of needed funding while setting a limit that’s too high could set you up for failure.
7. Deliver on Your Promises
Along with offering strong rewards, delivering on your promises may be the most crucial part of a successful campaign. The future success of your company is only as good as keeping your promises, especially if crowdfunding is going to be a regular part of your financial plan. A company that fails to meet deadlines without explanations (or underdelivers promised rewards) will lose the trust of its customers. This type of damage to your reputation could be fatal to your small business.
Crowdfunding is a growing solution to startup funding for small businesses. For businesses that don’t have revenue or are developing a new product or service, crowdfunding allows you to secure funding in exchange for goods or services promised to those who support your campaign. It’s one of many viable alternatives to getting a startup business loan. If you decide instead to apply for a small business loan, we have a guide to help show you how to get a small business loan.
Crowdfunding doesn’t always succeed. For example, just 39% of Kickstarter projects were successful, as of January 2022. However, 78% of projects that raised more than 20% of their goal were successfully funded. Looking into crowdfunding statistics should be part of your research plan.
Planning, research, and successful advertising of your campaign can be crucial to its success. Also, consult your compliance or legal advisors when considering a crowdfunding campaign, especially an equity-based campaign. With a well-thought-out crowdfunding campaign, your business can receive the funding it needs to continue to grow.