Crowdfunding 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. Before trying it for your business, learn about the benefits, hazards and regulations unique to this fundraising method.
What is crowdfunding?
Crowdfunding 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.
Funding platforms such as Kickstarter, SeedInvest, Indiegogo, and others host business and individual fundraising efforts.
These 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. Many will do so in exchange for a percentage of the total investments, plus fees.
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.
Before launching a campaign, you must decide which type of crowdfunding your company plans to pursue. There are four common types of crowdfunding.
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-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.
Microloan platform Kiva works this way, with the added twist that loans are interest-free.
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 crowdfunding 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. This type of crowdfunding is regulated by the U.S. Securities and Exchanges Commission.
How to crowdfund for 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 around 30 days.
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 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 fundraising campaign, be sure to 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.
Popular crowdfunding platforms for businesses
There are many options for new and established companies looking to source crowdfunding.
We’ve already mentioned Kickstarter, a reward-based platform for creative concepts, and Indiegogo, which is geared toward elevating technology projects. SeedInvest is a popular site for startups looking to gain traction and funds. Another well-established platform is StartEngine, which hosts debt and equity crowdfunding projects.
Limiting your campaigns to a certain time frame can help drive momentum and create a fear of missing out that compels investors. Not all crowdfunding efforts are time-limited, though.
One ongoing crowdfunding host is Patreon, where creatives and content creators can build committed memberships of supporters. These supporters pay a monthly subscription fee in exchange for exclusive content and access to their favorite creators.
Pros and cons of crowdfunding for small businesses
It enables business owners to reach investors of all backgrounds, from supportive neighbors to curious venture capital firms. It uses the internet and social media to amplify an idea, which can boost a project that may otherwise have limited reach. This unconventional method of raising capital can help entrepreneurs reach audiences outside their existing social, professional or geographic circles.
Conversely, crowdfunding can be a significant risk. While your project may pique investors’ interests, funds may not be available unless you reach the full campaign goal. Bear in mind what sort of cut your investors — and hosting platform — may require once you reach your fundraising goals. If significant equity or fees are required once fundraising is complete, your bottom line may be impacted.
The bottom line
Crowdfunding can be an innovative and attention-grabbing way to garner fast support for your business or latest idea. Be sure to do your homework on the front end, ensuring your effort is unique enough from any potential competition. You will also want to research your hosting platform to ensure a good fit and your funding goals to ensure they are realistic and worth the effort.
FAQs about crowdfunding
Crowdfunding involves raising money from a broad base of investors, typically through the internet. Donors are often driven by some level of financial or personal investment in the project.
Companies using equity-based fundraising can raise an aggregate of $5 million over a 12-month period through Regulation Crowdfunding. Per the Securities and Exchange Commission (SEC), different limitations apply to various kinds of investors.
Be sure the goal for your crowdfunding project covers the total cost of your effort and any fees or commissions your funding platform charges at the end of your campaign.
You may need to pay back crowdfunded contributions, depending on what kind of campaign you run. Donation-based crowdfunding usually operates without contributors expecting repayment; debt-based crowdfunding projects assume future repayment plus interest.