Where traditional fundraising methods are not suitable or available, crowdfunding for business may be a viable and powerful alternative. Over recent years it has evolved from being an informal, often community-driven method of financing, to one that has become more structured and underpinned by technology.
Crowdfunding is the process of receiving donations from the public to use for a specific reason, for example, starting or expanding a business. These funds are immediately earmarked for use and the fundraiser must follow through with this if the goal is met or exceeded.
Read on to understand more about what crowdfunding is, strategies for employing it, and how to make it work for a business.
If business loans are not an option, business owners may turn to crowdfunding to reach their goals.
Crowdfunding involves requesting contributions – or investments – from the public to allow the business to meet a specific goal. This could be to develop a new product, to market an existing one, or simply to provide the capital to start the business. In return for their contribution, investors could be offered rewards such as micro-shares in the company or something more tangible, such as the product itself, if the end goal is met.
Here are a few examples of businesses that found success through crowdfunding:
What happens if the fundraiser misses its goal? In some cases, all money is returned to contributors, and everyone involved goes their separate ways.
Businesses that use crowdfunding typically reach out to their personal and professional networks and use technology platforms and social media to reach a wider audience.
The global crowdfunding market was estimated to be $17.2bn in 2022 according to Market Data Forecast3 and is set to grow to $32.9bn by 2028, making it an increasingly important source of funding.4
Before deciding if crowdfunding is right for a company, business owners should consider the pros and cons.
There are several types of crowdfunding to choose from, depending on the small business’s funding goal. Read on to find out what separates them and how to determine the most appropriate path to take.
As the name suggests, this form of crowdfunding campaign offers contributors rewards, such as the product or service the business will offer. For example, an apparel business may offer exclusive stickers of upcoming designs or early samples of the merchandise.
Choosing equity-based crowdfunding entitles investors to shares in the business in return for their donation. This can work well for startups that project substantial growth. However, business owners should bear in mind that it’s subject to specific laws. They should also decide if they are willing to lose some ownership of their business.
A popular type of crowdfunding, this form relies on contributors donating while expecting nothing of financial value in return. This is often used by charities or in community campaigns.
More aligned with a traditional business loan, debt-based crowdfunding involves borrowing from peers and could be subject to interest rates.
Though no two crowdfunding campaigns operate exactly in the same way, there are steps that business owners should consider before they decide to go ahead. Here are a few areas of importance.
Before starting anything else, business owners considering crowdfunding should ascertain their end goal. This could be to start trading, update a product or simply stay in business.
Once determined, the mission should be translated into a compelling story that draws contributors in and shows them why and how investing could be the right step for them. Make sure any perks or rewards are laid out clearly at this stage too.
Popular crowdfunding platforms may have specialties that business owners should consider. GoFundMe focuses on donation-based crowdfunding, while Kickstarter leans towards a rewards-based model. Consider all the options and choose the one that best suits the purpose of the business.
The funding target is more easily reached if it’s appropriately estimated. Business owners may want to err on the side of caution as, in some cases, a failed crowdfunding campaign could mean the business receives nothing at all, despite months of hard work. The target should be high enough to make real change, but low enough to be attainable.
Marketing techniques will drive awareness of the campaign and could boost its chances of success, as well as building an audience of potential customers.
This step is key. Contributors want to know how the journey’s going, particularly if they’ve become emotionally or heavily financially invested. Transparency is essential after the campaign is over, too, as supporters will be keen to know the next steps, such as rewards lead times, for example.
After months of hard work, the campaign is over, and the business can enjoy the fruits of their labor by way of the funds raised. But the funds may not be released immediately, with times varying from provider to provider while they conduct audits, offer contributors a cool-down period, or perform any other admin they deem necessary.
The post-crowdfunding phase of a business’s journey may be a time for celebration, but it’s certainly not the time to rest on the laurels of success. Plans should be made for the use of funds, allocation of shares, distribution of rewards. All this should then be communicated to the investors.
If the goal is not met, then challenges will arise around how to find alternative sources of funding. Additionally, it is a time to reflect on the lessons learned in the crowdfunding process should another attempt be considered.
Leveraging crowdfunding could pave the way for a brighter future in business. Compose a successful campaign, and businesses could thrive with the backing of engaged, invested customers. However, first, business owners should be aware of the risks, such as an unsuccessful crowdfunding attempt, and take steps to mitigate any fallout.
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