Crowdfunding for business: The basics
Crowdfunding for business involves getting business capital by gathering many backers’ small contributions online. While these contributions are sometimes donated, contributors may also exchange their investments for company equity or other rewards.
Crowdfunding harnesses public interest and engages small investors with interest in a specific business or project. According to the Crowd Data Center, there have been over 898,000 crowdfunded projects from 2014 to 2024. The average fully funded crowdfunding campaign generates $213,769 with 341 investors. About 24 percent of projects are fully funded.
Based on these numbers, crowdfunding for a small business can be successful and help your business raise money without traditional debt. Before trying it for your business, learn about the benefits, hazards and regulations unique to this fundraising method.
What is crowdfunding?
Crowdfunding for a business involves a fundraising campaign, which is typically time-limited. The fundraising business publicizes its efforts and requests contributions for startup costs or a specific project.
There are websites specifically for these types of campaigns. While crowdfunding websites take a percentage of the money raised as a fee, crowdfunding donations don’t have to be repaid like a loan.
Crowdfunding companies will often take on some (or all) of the vetting requirements for investors, conducting due diligence on the company’s financials, licensure and business planning. Platforms also host a space for fundraisers to publicize their projects, making multimedia and social media sharing easy.
Getting access to contributions may be an “all-or-nothing” gamble, according to Candid Learning, an educational platform focused on philanthropy. Some platforms only send you the funds if your campaign reaches its goal by the time it ends.
“Less than half of all crowdfunding campaigns reach their goals,” the organization advises, cautioning readers to educate themselves about a platform’s fine print, guidelines and restrictions before committing to an agreement.
Types of crowdfunding for business
Before launching a campaign, you must decide which crowdfunding type your business plans to pursue. There are four common types of small business crowdfunding.
Donation
You’ve likely seen donation-based crowdfunding campaigns on social media. These campaigns commonly support charitable causes, such as helping with someone’s medical bills or replacing a family’s property after a natural disaster.
The popular platform GoFundMe allows individuals and community nonprofits to raise donated funds this way.
Some businesses will seek donations through crowdfunding, especially if there is a strong local interest in the product or cause. These crowdfunding efforts do not provide anything in exchange for donated funds, and donations are typically comprised of many small contributions (as low as a few dollars per person, in some cases).
Debt
Debt-based crowdfunding operates like getting business loans from multiple lenders. Contributors will commit a certain amount with the expectation that the fundraiser will pay back the funds — usually plus interest — within an established time frame.
The microloan platform Kiva works this way, with the added twist that loans are interest-free.
Reward
Reward crowdfunding is popular on Kickstarter, which hosts creative ideas and products. These crowdfunding projects offer contributors rewards at different giving thresholds — commonly a digital badge or sticker for smaller contributions and a tote bag or t-shirt at the next level up.
Top-tier rewards for major contributors to these campaigns can be lavish: Trips, celebrity meet-and-greets or free or early-release products.
Equity
Equity crowdfunding for your small business is a standard business model for entrepreneurs looking to fund startup or investment costs. This type of crowdfunding exchanges short- or long-term equity in the project or company in exchange for an investor’s initial contribution.
As with all crowdfunding, participants in this model run a risk — in this case, the possibility that their chosen venture may not gain value in the future.
How to crowdfund for a business
If you’re looking to crowdfund, there are a few steps you’ll want to follow. Here’s how to crowdfund a business.
1. Clarify your idea and audience
The first step toward success is to decide what you’re asking contributors to fund and what audience you’ll be asking. If you’re looking to crowdfund a specific investment or project, is it something for which you’ll source broad contributions?
Knowing whether you plan to pitch to local community members or like-minded entrepreneurs worldwide will inform your campaign’s style and goals. At this stage of the planning process, you want to conduct market research to assess your competition.
2. Decide on your goals and timeline
Next, decide how much funding you will need to raise to make the project — whether that’s producing a certain product or buying a storefront — a success.
Realistically, how long will you need to publicize your campaign and raise the money? Also, consider how long is too long for potential backers to wait if they commit early in the campaign. According to research from the funding platform Kickstarter, campaigns typically perform best when the duration is shorter, such as 30 days or less.
At this stage of the planning process, you may consider what type of crowdfunding best suits your business needs.
3. Choose a host platform
After researching which platforms host projects similar to yours, be sure to comb user agreements and fine print before selecting a host site.
Different platforms will have different guidelines and requirements regarding project type, funding timeframes and what happens if you do not reach your full fundraising goal. Fees also vary by platform.
4. Tailor and share your story
The most successful crowdfunding projects for small businesses have a strong narrative behind them. Be sure to enlist the help of talented storytellers throughout your campaign. The more you can compel possible investors through background information, foundational research, and appealing multimedia content, the more likely you will reach your fundraising goals.
5. Wrap your campaign and follow up with contributors
Once you’ve ended your small business crowdfunding campaign, follow up with those who have stepped in to contribute. Whether you reach your goal or not, these investors will want to know what happens with the project next. If you promised backer rewards, deliver them in a timely manner to avoid souring your company’s reputation.
Keep good records of who contributed and at what level. Leverage the relationships you build for future business.
Read the full article: https://www.bankrate.com/loans/small-business/crowdfunding/#how-to
