Crowdfunding for Business – A Complete Guide
Head of Content
⏱ Reading Time: 9 minutes
Beginnings are tough. Whether you are just starting your company or developing a new product or a feature, the first few steps in the unknown can be overwhelming.
Will the company be successful? How are your customers going to react to your new product? Will you have enough funds to keep up the pace?
When it comes to startups and small businesses, regardless of how high or low the fund’s streams are – crowdfunding is a must. In this article we are guiding you through tips and tricks of crowdfunding for businesses and start-ups!
What is Crowdfunding for Business?
Crowdfunding, as its very name explains, is online-based, money-raising concept people and businesses use to kickstart their projects and businesses at the early stages.
The concept is simple: offer an idea that people would love to support and launch it on one of many crowdfunding platforms. Follow the reward-based system and create a small-dollar contribution opportunity for your supporters. In case you get a lot of people to buy in, your idea will be supported and your goal achieved.
Thankfully, we’re in the digital era where it’s possible to invest in exciting product ideas, projects and business goals online. Total transaction value in the Crowdfunding segment is estimated at $8,537.3m in 2020, but according to The Alternative Board (TAB) Small Business Pulse Survey, less than 1% of business owners surveyed have used business crowdfunding or thought about using it.
Picture 1. Transaction value growth in crowdfunding segment by Statista
However, these numbers are changing with more and more businesses drifting away from traditional capital raising and turning to some of the most popular crowdfunding sites such as Kickstarter or Indiegogo.
Using intelligent marketing, a small business can not only raise funds for their goals but also reach hundreds, even thousands of potential early bird supporters. They will become their core marketing tools in the future.
How does Crowdfunding Work?
Business crowdfunding is not a new trend. Throughout history, we have seen wealthier people coming together to finance cutting edge ideas and ventures of bold entrepreneurs. The only thing that changed is that business crowdfunding today means knocking on digital doors of many, instead of few.
Today, crowdfunding platforms are tech-driven and automate many processes for fundraisers and backers (campaign supporters). Details such as payment processing, bookkeeping, legal framework and updates for investors are already a part of the business crowdfunding package.
On the other hand, project supporters can invest without the fear of losing money quite easily. From their phones, business crowdfunding backers can browse endless campaigns and invest within a couple of clicks. Crowdfunding platforms offer different types of crowdfunding which gather around different types of investors and investment models.
Picture 2. Building an international online crowdfunding community
Which Crowdfunding Types Are There?
There are four basic types of crowdfunding for business. Each of them attracts its own target audience and has a different set of rules. Before deciding upon the type of crowdfunding, think about your business goals and which benefits could you reap from each of these options.
REWARD-BASED CROWDFUNDING: Offer backers a reward in return for their investment. In case you’re funding for a product or service, your backers could get early access to your product with a discount. Nevertheless, each one of your early bird backers will also have the bragging opportunity of having the product before anyone else! Rewards aren’t limited to company products and could also include T-shirts, cups, mentions on social networks, a wall of fame recognition, etc.
EQUITY-BASED CROWDFUNDING: Each of your equity backers gets a share in your business. If you intend to launch an equity-based campaign, make sure that you understand the rules of the platform. Moreover, investigate it very carefully with the help of a qualified financial consultant.
CROWD LENDING: Investors in this form of crowdfunding seek equity in the business they’re investing in. Unlike equity-based crowdfunding, lending-based crowdfunding investors expect a fixed return on the shares they hold.
DONATION-BASED: If your organization is a registered nonprofit one, you can use crowdfunding to raise donations.
7 Best Crowdfunding Platforms
Business crowdfunding websites offer access to a large audience and allow a variety of campaigns while being humble on the fees. Here is the list of 7 best crowdfunding websites you should check out:
1. Kickstarter – Reward-based
Kickstarter is the biggest name on the crowdfunding sky with over 180,000 successfully funded campaigns and more than $4 billion pledged. This platform is best for types of businesses offering consumer goods like board games, tech, music and art which can be easily shipped to campaign supporters around the world.
If you opt for them, they will charge your businesses a fee of 5% for the successfully funded campaign. Moreover, you will also be responsible for a third-party payment processing fee of 3% to 5%
2. Indiegogo – Reward-based and equity-based
Following the Kickstarter’s success, Indiegogo is one of the top reward-based crowdfunding sites with more than $1 billion raised. Indiegogo is best for businesses focused on technology and innovation.
Indiegogo will charge businesses a fee of 5% for the successfully funded campaign. Moreover, you will be responsible for a transaction fee of 2.9% plus 30 cents per transaction.
3. Fundable – Equity-based and reward-based
Fundable is a crowdfunding platform, which is aimed at healthy startups ready to expand. Unlike many other sites, Fundable doesn’t take a percentage of the funds you raise. It charges a monthly fee of $179 plus transactional fees. The downside? You pay the fee, whether you are successful or not. Therefore it is a great deal for startups with a lot of confidence in their ides.
4. GoFundMe – Donation Crowdfunding
GoFundMe is a donation crowdfunding website meaning that there is no equity to give up, no debts to repay or products to ship. Moreover, GoFundMe is not charging any fees for crowdfunding if you are based in the USA, but you will be responsible for the transactional fees when funds reach you.
5. Prosper – Debt crowdfunding
Prosper offers personal loans of up to $35,000 from investors after the completion of a short application. Offered as a personal loan, these finances can be useful for people looking to refinance debt, individuals starting a business, consumers facing financial debts, etc.
6. Patreon – Reward-based
Patreon has a unique perspective on crowdfunding. Rather than promising to deliver a product to the backers in the future, businesses get paid as they deliver goods to their backers. For these purposes, businesses on Patreon produce some form of entertainment to keep their backers coming and spreading the word.
Patreon is best for creative business crowdfunding and it charges the fee of 5%-12% of successfully processed payments made to creators. Also, you will be responsible for a third-party transfer fee, typically around 3% when you withdraw funds.
7. Crowdfunder – Equity-based
Equity crowdfunding website Crowdfunder has successfully raised over $150 million for startups. A subscription-based system lets you access unique investors list for a monthly fee which can be either $299 or $499, depending on the package you chose. Crowdfunder is powered with a strong CRM tool to help you with campaigning.
Strategically, Crowdfunder is best for businesses that intend to fund from private (invite-only) sources or want to launch a crowdfunding campaign but need the funds to get started.
How to Build a Crowdfunding Community?
Regardless of the crowdfunding model you choose, small business crowdfunding at its core is about investments from people around the globe. And, what differs everyday users from crowdfunding ones is exactly that – skin-in-the-game attitude which goes beyond consumerism.
Their investment can range from rewards to equity or donation-based concepts, but the end result is always the same. If a person believes in a small business or a start-up enough to invest, they are going to be the first to spread the word about your brand. Crowdfunding investment in a small business or a start-up transforms average users to a large dedicated community.
So crowdfunding is generally a good way to gather a group of brand ambassadors right at the very beginning, which will be proud and eager to help you kickstart your business.
Crowdfunding for Business Benefits
1. Crowdfunding debt is flexible
Small business loans in banks usually take up to 3 months before being processed and approved. Also, most of the bank loans are specific to what your funds are intended for. That investment approach is oriented towards old-school business models.
When going into crowdfunding debt, the platform, crowdfunding type, and your campaign dictate the way you’re out to pay your debt. For example, reward-based crowdfunding debt will be paid off as soon as you send out all the rewards to your backers. Equity, on the other hand, means that you and your legal team will have to conduct a set of rules for the equity part of your backers.
Is there a better way to conduct market research and validation than to present your idea and business plan to your end-users?
Crowdfunding preparation implies great marketing know-how. Starting from the visual presentation to the communication type you’re going to use to present your idea and benefits for your backers and end-users, everything plays a role in your campaign success.
The first 24 hours of your crowdfunding campaign are the most important. In that phase crowdfunding platforms decide upon your campaign visibility in relation to your early backers’ support. The ultimate goal is to reach your target within 24 hours which will grant you homepage visibility.
And how can you achieve that? Well, there are different ways – you can use e-mail marketing campaigns, reach out to your network or through social media advertising, PR or influencer marketing. Whichever you choose, think about your goal and your audience first, and what kind of communication they prefer.
3. Mitigate financial risk
When you get a loan through a bank, you have to pay it back with interest. If you engage investors, this may lead to sacrificing the equity of your business. On the other hand, using reward-based crowdfunding, you’re not putting your business at stake. Quite the opposite, crowdfunding is all about sourcing income through good-willed individuals that like your idea and want you to succeed.
Business Crowdfunding Goals
According to thousands of successful crowdfunding campaigns, the internet is full of people eager to support valuable new ideas. By using a proper crowdfunding platform, you can fund just about anything. Find backers for a wide range of projects, campaigns or products. The possibilities are as wide as your creativity!
Some of the most common crowdfunding goals for small business fundings are:
- Acquire new equipment
- Hire employees
- Purchase real estate
- Launch new product
- For non-profits: raise donations
- Raise venture capital
Picture 3. With the right approach, crowdfunding can be used to fund any kind of business venture
Are you a business owner with a great idea that will launch your brand to the stars? Maybe you are an employee who’s got just enough of the 9 to 5 mindset? Or you’ve built a career as a freelancer and you’ve got some extra time on your hands and a solid business idea? When you are launching a startup, you have several options. The first thing that comes to your mind is probably a small bank loan that, in the end, takes way too much. There is also an option of contacting friends and family who might not always be a sure source of income or venture and angel capitalists which are an even further end.
Luckily, with crowdfunding most of the things lie in your hands only. The concept is rather simple – you just need to offer an idea that people would love to support and give them the opportunity to contribute with small-dollar rewards. So just get creative and your business venture will turn into much more than just dreams.
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