Crowdfunding for Business – A Complete Guide 2019
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Beginnings are tough. Whether you are just starting your company, developing a new product or a feature, the first few steps in the unknown can get you overwhelmed.
Will the company be successful? How your customers are 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 the tips and tricks of crowdfunding for business and start-ups!
What is Crowdfunding for Business?
Crowdfunding, as its bare 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 the many crowdfunding platforms. Follow the reward-based system and create a small-dollar contribution opportunity for your supporters. In case you ’ve got 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. The estimated volume of total crowdfunding worldwide is $16 billion, 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. Business crowdfunding cheat sheet infographic from Entrepreneur
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 promotion, not only a small business can raise funds for their goals but 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 see those with capital coming together to finance cutting edge ideas and venture 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 and updates for investors are already a part of the business crowdfunding package.
On the other hand, projects supporters can invest without the fear of money loss – easy. 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 model.
Picture 2. Building an international online crowdfunding community
What are the Crowdfunding Types?
There are four basic types of crowdfunding for business. Each of them attracts its own target audience and has its own set of rules. Before deciding upon the type of crowdfunding, consider your business goals and benefits each of the crowdfunding types could contribute to your business.
REWARD-BASED CROWDFUNDING: Offer backers a reward in return for their investment. In case you’re funding for 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…
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, you can use crowdfunding to raise donations.
7 Best Crowdfunding Platforms
Best business crowdfunding websites offer a large audience and allow a variety of campaigns while being humble on the fees. Here is the list of 7 best crowdfunding websites for business crowdfunding:
1. Kickstarter – Reward-based Crowdfunding Site
On the crowdfunding skyline, Kickstarter is the biggest name with over 158,000 successfully funded campaigns and more than $4 billion pledged. Kickstarter 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.
Kickstarter will charge 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 Crowdfunding Site
Following the Kickstarter’s success, Indiegogo is one of the top reward-based crowdfunding sites with more than $1 billion raised. Just like Kickstarter, Indiegogo is best for businesses which are involved around consumer goods such as food and games.
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. LendingClub – Debt Crowdfunding Site
If you have a time-sensitive idea and are in need of quick finances, LendingClub is the best crowdfunding option. Having raised over $20 billion for applicants, LendingClub also offers small business loans up to $300,000. Loans with LC have the terms of up to five years of debt.
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, but you will be responsible for the transactional fees when funds reach you.
5. Prosper – Debt Crowdfunding Site
Similar to LendingClub, prosper offers personal loans of up to $40,000 from investors after the completion of a short application. Offered as a personal loan, these finances can be used to fund your business. Patreon has $14 billion experience in funding businesses and its one of the best options for startups. However, this financing option can put your personal assets at risk.
6. Patreon – Reward-based Crowdfunding Site
Patreon is a relatively new crowdfunding platform and 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% any 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 Crowdfunding Site
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 of $400 which is a low-cost equity solution. Crowdfunder is powered with strong CRM tool to help you with campaigning.
Strategicaly, Crowdfunder is best for businesses that mean to fund from the private (invite-only) sources or are meaning 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 to cope with it – reward based, equity-based, crowd lending or donation-based, 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 reward, equity or donation based concept, 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 community.
That steps forward as your first batch of brand ambassadors is proud and eager to share their experience with you!
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 be having to conduct a set of rules for the equity part of your backers.
What is the best 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 creative materials your going to use, the angle you’re going to present to your backers and benefits to your 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 backer’s support. The ultimate goal is to reach your target within 24 hours which will grant you homepage visibility.
The way you’re out to achieve that could range from e-mail marketing campaign to your network, social media advertising, PR or influencer marketing.
3. Mitigate financial risk
Acquiring loans through banks will need to be paid back with interests, bringing on investors may lead you to sacrifice equity of your business. 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 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 open 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. Acquiring marketing knowledge using crowdfunding
Wrap it up
You’re a business owner with a great idea that will launch you to the big brand’s skyline, but all you need is a cash injection to get there. Maybe you’re an employee who’s got just enough of the 9 to 5 mindset? Freelancer with some extra time on your hands and a solid business idea? You’ve got several options. A small bank loan that takes way too much? Friends and family support? Venture and angel capitalists?
Luckily, these are not your only options. Crowdfunding concept is simple – offer an idea that people would love to support and give them the opportunity to contribute with small-dollar rewards.
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