Crowdfunding is Actually on the Rise for Small Businesses
Got a great idea that will grow your business? Just need a cash injection to get there? You’ve got several options. You can ping your family and friends—surely someone’s got a little cash lying around to invest in your business. But let’s say you’ve already done that. Next? Maybe a small business loan? But the bank isn’t interested. Same with the Angel Investors you’ve approached. You’ve got credit cards—but you’re still paying them off from that time you maxed them out to cover payroll.
Have you tried crowdfunding? Ninety-nine percent of businesses haven’t, but that’s about to change.
The Alternative Board (TAB) March 2016 Small Business Pulse Survey found that less than 1 percent of those businesses surveyed had used crowdfunding. Yet that number jumped four times when the same group was asked where they’d turn next time they need to inject additional capital into their business. It turns out that more and more businesses are starting to look to crowdfunding as a real option.
What is crowdfunding, exactly?
The concept is simple: Offer an idea that people would love to support with small dollar contributions. If you get lots of people to buy in, you raise lots of dollars. Thanks to the internet, if you have the right kind of product or exciting project, you can launch your campaign via a crowdfunding platform. With some intelligent promotion, you have the ability to get your idea in front of hundreds, even thousands of potential backers.
How do I get started with crowdfunding?
It turns out, there are a surprising number of crowdfunding platforms out there that you can turn to. The most popular are Kickstarter, IndieGoGo, and GoFundMe. Each crowdfunding platform targets certain niche funding pools, so it will be imperative to research each platform to determine which one will offer you the best exposure. Of course, all of these platforms charge a fee for their service and have rules on the terms of the funding (more on that below). As you explore your options, make sure you understand the fee structure, funding model, and other details to be sure you find the right platform for your campaign.
What kind of projects are best for crowdfunding?
You can find backers for a wide variety of projects, campaigns, or products. Believe it or not, the internet is full of people eager to support new concepts and products, or who want to get in on the growth of small businesses. The possibilities are as wide open as your creativity, but some of the most common ways crowdfunding can be used to grow a small business are:
- Acquire new equipment
- Hire employees
- Purchase real estate
- Launch new product
- For non-profits: raise donations
- Raise venture capital
Where do I find donors to back my business?
Believe it or not, there are a lot of people out there looking to back your ideas. When you’re thinking through your options, keep the following in mind.
Consider your ask: Is it a good fit for crowdfunding?
It will pay to think carefully about your target backer’s demographic. Crowdfunding isn’t for everyone. Millennials tend to be the biggest backers of crowdfunded projects. Your ask should appeal to your target audience, but be certain that your target audience is the type to use crowdfunding in the first place.
Projects that are exciting, unusual, or have a humanitarian appeal elicit the most support. New tech products—like the Pebble Watch—reliably generate excitement. Unusual projects can be hit or miss, but when they click with the masses, they can win big, like Axent Wear’s Cat Ear Headphones, which raised 1,172 percent of their goal totaling over $3.4 million. Humanitarian projects, like research into cures for disease and (believe it or not) a bailout for Greece, have also been extremely successful. Your campaign should offer backers a chance to tap into the energy of a cutting edge project, or a meaningful initiative they can get behind.
Consider your reward: Will it draw the right donors?
Just like any transaction, your donors want value in exchange for their support. Crowdfunding works because of two reasons: 1. People get excited about new opportunities and want to be a part of the cutting edge. 2. They get something out of it for themselves. When you offer your backers an interesting return for their investment that hits both of these points, you’ll have the best shot at drawing the right donors.
What type of crowdfunding is right for me?
There are four basic forms of crowdfunding. Each kind attracts its own set of donors, each has its own set of rules, and each offers unique benefits to your small business.
- Reward-based: This type of crowdfunding offers backers a reward for their investment. If they’re backing a prototype product, donors at certain levels could get early access to buy at a discount, or have the bragging rights to own the product itself before their friends. Rewards aren’t limited to company products. Rewards could be tchotchkes, like tee shirts. The rewards can be as wild as you want to make them: backers could get a brick in the foundation with a message stamped on it, or a hand-written thank you note. To get a sense of what can work and how far you can stretch the limits, search for small businesses in your field that are using crowdfunding and see what they’re doing. Most crowdfunding sites will show each tier of rewards and which tiers are selling out fastest, giving you a good sense of the most common investment amount and respective reward.
- Equity-based: The SEC recently ruled that you can use crowdfunding to offer backers an equity stake in your business. This has the potential to rival traditional venture capital. Thus the SEC has taken a keen interest in the mechanics and growth of this new revenue stream. Be aware: If you intend to launch an equity-based campaign, ensure that you understand the rules. This one is a little more complicated, and if you intend to pursue this kind of funding, investigate it very carefully with the help of a qualified financial consultant.
- Lending-based (aka debt-based, or crowd lending): This can be a great way to secure a loan because it can offer a lower interest rate and more flexibility in the terms. Investors in this form of crowdfunding seek equity in the business they’re investing in, which makes it similar to but subtly different from equity-based crowdfunding. In equity-based crowdfunding, investors take shares of your business with the hope that those shares will grow in value over time. In lending-based crowdfunding, investors expect a fixed return on the shares they hold. This one’s complicated, too, so as with equity-based funding, you should be sure to investigate it very carefully with the help of a qualified financial consultant.
- Donation-based: If your organization is a registered nonprofit, you can use crowdfunding to raise donations. A charitable organization, like a homeless shelter, could, for example, raise funding for an upgrade to their kitchen facilities. Among the rewards, you can offer a tax-exemption for the donations and the feel-good appeal of helping a non-profit succeed.
One risk (that could become a serious cost) to keep in mind: if you are planning to use equity-based or lending-based crowdfunding, remember that for a relatively low cost, your competition will have access to your business plan. Don’t give away the candy store. Investors will want to know how viable your idea is, but your intellectual property (IP) could be on the line. While you will probably be gung-ho for your idea, don’t give away IP or other sensitive details in the materials you provide potential investors.
How do I promote my crowdfunding project?
Just like every other effort, crowdfunding is not some kind of easy-money, overnight success. There’s no such thing.
Keep in mind that you have to put in some sweat equity if you want to give your project its best shot at success. Your great idea on its own won’t be enough to get you funded, and neither will the fact that you simply posted your project to a crowdfunding website. It’s up to you to create the buzz and create interest. As Crowdfunder.com puts it, “Campaigns Never Fund Themselves: Great campaigns are funded by great engagement—this is what turns attention into dollars.”
Crowdfunding works best when your business has a solid social following where you can promote your venture—the more shareable, the better. A great idea that excites your social network can gain traction as donors share your project with their social networks, extending your reach beyond your immediate social circles.
Additionally, your email contact list will come in handy. You can create awareness through email campaigns that not only promote your idea but update your list of your success and communicate how the success of the campaign will benefit them in the long run.
Are there costs associated with crowdfunding?
On top of the effort cost to you for promotion, don’t forget that each crowdfunding platform has its own fee structure and terms for success. After all, they’ve got to make money, too.
Kickstarter takes a 5 percent fee only if you reach your goal, for example. In addition, there are payment processing fees to consider, such as Kickstarter’s 3 percent plus $0.20 per pledge. Set your goal high enough to complete your project as well as cover all the associated fees. It’s helpful to plot out a budget in a spreadsheet comparing the total cost including the fees of each of the crowdfunding platforms that you’re considering. This way you can have a dollar-for-dollar analysis of the full cost you’ll need to cover. It can’t be emphasized enough that you need to carefully weigh the terms of the crowdfunding platform you’re using.
Then, there’s the question of whether or not you make your fundraising goal in the allotted time. You must account for how the platform terms dictate your use of the funds. For Kickstarter, if you don’t make the deadline, you don’t get any money. This can be quite devastating, not to mention that you may have to deal with a little egg on your face. However, for Indiegogo, you get to keep whatever money you raise, but if you don’t hit your target amount, they increase their fee from 4 to 9 percent, which can impact your cost projections. And don’t forget: If you don’t hit your goal, you still have to send your perks to all the backers who supported you if you take their money.
On that note, be sure you carefully consider the cost of the perks you offer. This, too, requires careful budgeting so that you can deliver on your promise. Don’t make the very bad mistake of over promising and under delivering. Your commitment to crowdfunding includes doing absolutely everything you promised; this means completing your project 100 percent as well as delivering all your perks.
For example, I once backed Copper Horse Coffee Roasters, a small coffee roaster in Ithaca, New York, with a $20 investment to help them launch their business. My perk was a pound of coffee and a handwritten thank you note. The company had to send me a pound of coffee, plus pay to ship it to me, in addition to the labor cost associated with fulfillment and writing the note. If they didn’t do the math at the front end, they may have run into trouble delivering on their commitments.
Here’s one more point to consider: Backers can support you from all over the world, which could impact your shipping budget. You can specify special international shipping terms in your campaign, so keep in mind what it will take to cover your costs before you launch the campaign.
Crowdfunding is a major revenue stream that many small businesses miss out on, if only because they don’t realize just how much power it really holds. Just like every other aspect of your business, it will take work, and there are some risks, but if you put the kind of effort into it that you’ve put into the other areas of your business, it could reward you with the cash injection you really need.
One of the less-emphasized benefits of crowdfunding is the value of the exposure that your campaign can bring. A great crowdfunding campaign is one more place to show the world how awesome your business is, and it’s a great way to build interest in your brand. If your idea is exciting and interesting enough to catch the attention of the crowdfunding platform, you could find yourself on their front page, which (it sorta goes without saying) will be a massive boost to your brand, your product, and your fundraising effort. (Here’s how Kickstarter chooses front page features.)
While crowdfunding may not be your first thought when you consider ways to add a cash injection to your business, there’s a good chance that it could actually be just the thing to bring in the funding you’re looking for. So, as they say, don’t knock it ‘till you try it.
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