Crowdfunding: Is it Right for Your Business?
New Funding Options
So far in our startup capital series, we’ve discussed small business administration loans and broke down debt vs. equity financing. But today we have an even more exciting financial topic, and a newer option to the funding market, crowdfunding. Crowdfunding offers both an accessible and nimble funding option while also providing marketing & visibility for your business, validating your idea, and growing your customer base.
What is Crowdfunding?
Crowdfunding is a fundraising tactic that relies on the collective contributions of individual investors, but the kicker is that crowdfunding platforms are hosted online and rely on the power of social media and sharing to create a successful fundraising campaign. There are two types of crowdfunding platforms, rewards-based and equity-based.
Rewards-Based Verse Equity Crowdfunding
In a rewards-based crowdfunding campaign, investors contribute to a campaign with the promise of receiving a “reward” often in the form of a product or service down the road. Equity crowdfunding sounds like what it is called as well, where crowdfunders provide your company with working capital in exchange for a piece of ownership in your company.
Advantages and Disadvantages of Crowdfunding
So we’ve given you the 411 on crowdfunding but what can you expect to get out of a crowdfunding campaign? Should every startup try crowdfunding? Are there any reasons crowdfunding might not be the right fit for your business? Let’s first look at the advantages.
Efficiency. In an early-stage business, it’s go go go all the time – there may not be enough time to pitch to investors or pursue traditional funding routes. Crowdfunding can offer an accessible way to pursue financing with a more limited lift. Think, choose a platform, post a video, share your story and you could be well on your way to cash (but more on how to be successful below).
Expanded Investor Pool. When you take the traditional route to pitch to investors, your pool of investors may be limited to your network and who they know. But with crowdfunding all of a sudden, an investor can be anyone and they can be located anywhere in relation to your business. With an expanded investor pool comes an expanded opportunity for success and reaching the right investors.
Pre-Funding. Maybe you’re trying to launch a second product but you don’t have the funds to do so. A rewards-based crowdfunding campaign will offer you the opportunity to pre-fund your next product and if all goes well, you’ve created a loyal customer base eager to buy from you the next time around.
Traction & Validation. If you put your business on a crowdfunding platform and are able to attract a group of interested investors, then voila! you have social proof and validation that your business is on to something. This validation, and thus traction, can then be used to pitch to investors later on to show proof of concept.
Free Feedback. Though this can be a bit of a double-edged sword, putting your story and product/service on a crowdfunding platform will create a lot of opportunity for feedback. Try to take this feedback in a stride and think of it as a way to improve your product/service for your target audience, making sure your business is fulfilling a real gap in the market.
Marketing. Look if you don’t know this already, you will soon. Marketing can be expensive, but thankfully your crowdfunding campaign doubles as a marketing campaign. The power of sharing your campaign on social media can spread far and wide and might even reach the desk of a VIP investor. And while your campaign may not go viral, your campaign will certainly extend your reach beyond your immediate network which is a great first step.
At this point you might be thinking where do I sign up?! Crowdfunding sounds awesome and I’m on board. Well before you jump in headfirst let’s also consider the cons of this approach to funding.
Time Wasted. Some platforms only pass through the funding if your target for the campaign is reached (or surpassed). In which case, if you don’t meet your goal, even if you’re just shy, you’ve spent a lot of time on your campaign without the cash prize at the end of the day.
Sharing & Transparency. Equity platforms will require a certain level of transparency, especially when it comes to your financials. So either you have to be comfortable putting it all on the table or equity crowdfunding is not for you.
Loss of Ownership. One of the greatest parts of being an entrepreneur is ownership. As the owner of your business, you call the shots. But with equity crowdfunding you have to relinquish some of your ownership in exchange for funds, so you should fully consider the repercussions of this and the value you gain in return before diving into this option.
Deliver the Rewards. If you sign up with a rewards-based platform then you will have to provide the promised return on investment when the campaign is over. So make sure you’re fully prepared to switch gears from fundraising to production and shipping right away.
How to Run a Successful Crowdfunding Campaign
If you’ve made it this far, you’ve probably weighed the advantages and disadvantages of crowdfunding and found it to be a good potential source of funding for your business. But there is one more BIG thing to consider and that is how do you run a successful crowdfunding campaign? Think about it, if crowdfunding is all about sharing, exposure, and social media, you’re going to need a plan to maximize your chances for success. You can’t simply post your campaign and hope for the best. Here are some tips for making sure you’re doing all that you can to reach your crowdfunding goals.
6 Tips for Crowdfunding Success
- Do Your Research. Before you launch your own campaign take a look at the competition. At this very moment, you have access to literally millions of crowdfunding campaigns. What can you learn from the successful campaigns, paying careful attention to similar industries? Really take the opportunity to dig into what those who have gone before you are doing well and what you can improve on.
- Determine Your Goal. One of the keys to fundraising is determining your goal. How much money do you actually need to fundraise? The best way to do this is to use a financial model that will allow you to forecast your cash needs and extrapolate your crowdfunding goals from there.
- Create a Launch Plan. The first 48 hours are critical, so you will need a plan of attack. Like I said you can’t just post your campaign and rest on your laurels. What can you do leading up to your campaign to create interest and anticipation? How are you going to bring eyes to your campaign after it launches? Being able to check things off of a well thought out plan, as opposed to sharing it willy nilly will boost your chances for success.
- Content & Presence. Before you launch your campaign, take stock of your current Internet presence and any content on your website and social media. You want to make sure you are well represented online before investors visit your website and do their own research. Does your blog show that you are an expert in your industry? Are all of your social media profiles current and a good representation of your brand? If you find your presence lacking take the time to tackle this before considering a crowdfunding campaign.
- Leverage Your Network. You likely already have access to a great network that you will want to actively tap into and include in your launch plan. This network includes your current email database, your social following as well as any organizations you’re apart of. You can even gorilla-style email organizations and connections you think may have an interest in sharing your campaign. Also, if you’re currently working with any marketing or public relations vendors bring them into the fold so they can help push out your campaign too.
- Deliver. This final tip is especially true for rewards-based campaigns. If you are promising a product or service in exchange for an investment, you sure as heck better have a well thought out plan for how you are going to deliver on your promises when the campaign is over. Missed deadlines and shoddy packaging jobs will not make loyal customers out of your investors.
Now you’re ready to take everything you’ve learned about crowdfunding and find the right platform for your fundraising goals. To help you with this endeavor, we’ve included the top 5 rewards-based crowdfunding platforms and the top 5 equity crowdfunding platforms below.
Top 5 Rewards-Based Crowdfunding Platforms
Top 5 Equity Crowdfunding Platforms
How to Make the Best of People’s Generosity?
Crowdfunding has grown into an excellent way for entrepreneurs and early-stage companies to validate their business model, find capital and early adopters, and get the exposure they need to grow.
If you’re considering taking your business’s funding needs to an online crowdfunding platform, or have already succeeded at your crowdfunding venture, making sure that you make the most of your influx of cash flow is absolutely integral. If you could use some support managing your cash flow, using a cash management tool may be exactly what you need to track your cash and forecast your runway. If you don’t want to build one from scratch, we invite you to join our cash management course where we’ll give you a templated cash model and help you learn how to use it.