Find out if crowdfunding is the right strategy for you
What is crowdfunding?
If you’re an entrepreneur, it’s likely that you’ve heard of crowdfunding. However, you probably also have some questions about it, like “what is crowdfunding?” and “how does crowdfunding work?”
The classic crowdfunding definition is sourcing money – usually via online means – from a group of people. By reaching a large number of individuals, those doing the crowdfunding often raise large amounts of money without taking out loans, emptying out their savings or tying themselves to venture capitalists or banks.
Today’s crowdfunding efforts finance everything from independent films to research and even life-saving medical treatments. Modern crowdfunders leverage the power of social media and digital presence to encourage and inspire people to invest.
Crowdfunding dates back to the 1700s. The Irish Loan Fund, crafted by Gulliver’s Travels author Jonathan Swift, asked wealthy citizens to provide loans to poorer people across Dublin. Crowdfunding as we know it appeared in 1997 when British rock band Marillon utilized online donations from fans to fund a reunion tour across the United States. Keyboardist Mark Kelly sent out an email detailing the money the band would lose if they went to the U.S.; fans decided to raise the money themselves.
The word “crowdfunding” was first used by Michael Sullivan in 2006, when he tried to attract funding to a video project incubator on his company site. The project eventually failed, but a year later, crowdfunding platform Indiegogo launched.
Indiegogo co-founder Slava Rubin found his inspiration in a woman who had been consistently turned down for in-vitro fertilization. Hospitals, doctors and insurance companies would not even afford her “the opportunity to fail,” which Rubin believed was everyone’s right as a citizen and human being. With his company’s help, crowdfunding gave her the chance to at least try to beat the odds. It can do the same thing for your business.
Those who have found a passion and want to turn it into a profit are usually the most successful with crowdfunding. Take BluffWorks creator Stefan Loble. He has raised over $340,000 on Kickstarter not because he has a good product – wrinkle-free travel clothing – but because he’s viewed by those who contribute to his campaigns as incredibly passionate about what he does.
How does crowdfunding work?
Before going into the advantages of crowdfunding versus other avenues to fund your business, we must fully answer the question of how crowdfunding works. To qualify as crowdfunding, a platform such as Kickstarter or Indiegogo has to put your project or cause in front of a huge number of people. Successful crowdfunding platforms also make it easy for users to invest and provide some type of reward or return on investment as an incentive. Many crowdfunding opportunities can expose your idea or business to millions of potential investors. That’s a lot of wallets that can potentially help you reach your funding goals.
Advantages of crowdfunding
Raising a lot of money within a short amount of time – and without a lot of face-to-face effort on your part – is a huge advantage. Here are more:
1. Diversification
Much like the logic behind diversifying your investment portfolio, a crowdfunding investment is typically spread across many individuals, each of them donating a small sum. This is appealing to both parties involved in a crowdfunding for business effort; it negates the risk of depending entirely on one or two sources (like venture capitalism) and spreads the financial labor across a wider field. If one investor falls through, it barely makes a dent in your funding efforts.
This makes crowdfunding attractive to solo entrepreneurs, artists and other creative types who are trying to fundraise for a new project. They may have been burned by partners, donations or investors before and have a difficult time trusting those who could harm their venture. Crowdfunding campaigns are easy to set up, often require little to no maintenance other than posting updates or fulfilling rewards and provide a tangible way for people to contribute funds in a safe and secure manner.
2. Opportunity to connect
When you look at how crowdfunding works and why it has become popular, you have to take into consideration that both the funder and the business or cause being funded benefit. Crowdfunding allows you to connect deeply with the potential customers of whatever field you’re in. If you’re a writer, you reach potential readers; filmmakers tap directly into future moviegoers. Crowdfunding provides the opportunity for a unique type of advertising: You can present your full story to your potential investors and release updates and changes in real time, as well as solicit audience engagement and feedback. This leads to a relationship that instills trust and loyalty in the investor and turns customers into raving fans.
3. Polishing your presentation
Whether you’re crowdfunding for your own creative pursuits or launching a new product or service, you need a pitch or presentation to succinctly describe your project to others. When you use crowdfunding, you can polish your presentation by getting a look at what you provide from the top level. Because you need to address history, marketplace, your offerings, value propositions and more before you launch a crowdfunding campaign, you have everything ready for future presentations.
The amount of money raised is a metric for how well a new style of art will be received, or a barometer for a band that is not sure if their fans will appreciate a different sense of musicality with a new album. Knowing that you have a product or service that your customers truly want is what takes you from being a “wantrepreneur” to a true entrepreneur.
4. Improving your marketing efforts
When you fully take advantage of crowdfunding , you leverage media and marketing in your favor. Since crowdfunding campaigns are digital, any project can optimize graphics, videos and other visual aids to attract a large amount of donors. Other media will likely cover your fundraising efforts and you can piggyback on this to share news of your venture on social media, through email newsletters, in traditional advertising campaigns and through other digital avenues. Everyone loves a good Cinderella rags-to-riches story, and crowdfunding is a perfect avenue to tell that type of tale.
5. Validating your offerings
One of the big risks of launching a new endeavor is gambling on whether or not your target audience will become loyal customers. An advantage to crowdfunding is that you get to present your concept to huge numbers of people and get their feedback early in the game. As you tweak your marketing efforts and presentation skills, you also address holes in your concept before it’s too late and truly create a product or service that solves your customers’ problems. Remember, for your business to be successful, your customer’s life is your business’ life and crowdfunding lets you discover what that life looks like.
6. Fundraising efficiency
Efficiency is what makes crowdfunding work. When you streamline and focus your fundraising efforts, you eliminate a lot of the legwork that goes with approaching different sources of revenue. This not only saves you time, but it also saves you money and lets you focus on developing your message and creating a solid brand.
There’s a reason why social media has become one of the top ways to fundraise for nonprofits and that same concept holds true when it comes to crowdfunding: when you easily get your message out to thousands of people, your funding results explode.
Drawbacks to crowdfunding
Like any endeavor, crowdfunding has its shortcomings. The goal of crowdfunding is to reach a certain target goal. If you are unable to reach that goal, your investors get their money back and you go away empty-handed. In addition, the public nature of crowdfunding means your reputation could take a hit if your project fails or falls through. If you don’t get your rewards or returns right, you could end up giving too much of your project or company away to investors and negatively affect future profits. If you’re considering crowdfunding, you would benefit from working with a business coach who can help you delve deeper into the pluses and minuses of a campaign to see if it’s right for your project.
Types of crowdfunding
What is crowdfunding if not a multifaceted opportunity to choose the platform that best suits your project? It’s certainly not a one-size-fits-all endeavor. Though there are hundreds if not thousands of opportunities to crowdfund, most of them fall into one of these four primary methods:
1. Donation
This is the most well-known type of crowdfunding and it’s probably what comes to mind when you consider what crowdsourcing involves. You take your product, service or story directly to the people, asking them to donate as much as they’re willing to your effort. They do this without any expectation of reward and from a true desire to give back. You may choose to provide something small to those who make particularly high donations, but money is contributed in the true sense of the term: Your backers don’t expect anything in return.
2. Reward
The next step up from donation-based crowdsourcing is reward-based crowdfunding. You’re asking for the same amount of money from the same number of people, but you’re offering them rewards in exchange for that funding. Rewards are typically tiered and related to the product, service or project. If you’re crowdfunding a furniture store, those who donate $50 might receive a small piece of décor; those who donate $500 and up might receive a piece of furniture like a footstool or bookcase and those who donate over $1,000 receive a custom-designed piece. Rewards (and benefits that happen after the initial funding round) are a common crowdfunding tool and can be a very effective business growth strategy.
3. Debt crowdfunding
Compared to the two methods described above, debt crowdfunding looks more like a loan. And that’s exactly what it is – a loan, albeit one taken from a group of interested people instead of one person or a bank. Also referred to as peer-to-peer lending, debt crowdfunding requires you to pay back the loan – or the portion of each loan, plus interest – to each investor at a date specified in the initial agreement. While there is more risk involved in this type of crowdfunding, it’s attractive to those who are not comfortable asking for outright donations.
4. Equity crowdfunding
Equity crowdfunding is much like what it sounds like: Investors finance your product, service or business through a platform, but they receive a percentage of your business – equity – instead of the repayment of a loan. The incentive of this crowdfunding strategy for investors to donate is tied to the success of the venture; if your company or project does well, then their equity is worth more. If your venture does not do well, their investment may have been for nothing. Since your potential investor must truly expect nothing in return – even though they hope for the best – it’s up to you to convince them that their investment will be a wise one.
Crowdfunding for businesses
Crowdfunding is an effective tool for businesses large and small to get off the ground or raise capital for a specific project. When taking your company’s story to the people, remember these tips:
1. Own your narrative:
It’s vital for businesses interested in crowdfunding to effectively tell their story. The narratives created by some companies come off as impersonal to customers, so highlight stories that are personal and emotional during a crowdfunding campaign to help set the stage for your company’s overall goal and vision.
2. Make it scarce:
Businesses running a crowdfunding campaign based on a physical product must cultivate demand for some higher tiers by limiting the number of higher level rewards. Higher demand will result in higher pledge amounts.
3. Get corroborating evidence:
All crowdfunding campaigns need an element of social proof to be successful. Focus on incorporating testimonials, lists of endorsers or a brief overview of company advisors as part of the crowdfunding campaign. Transparency to supporters and partners will inspire confidence in potential backers.
4. Communicate:
Businesses engaged in a crowdfunding campaign need to stay engaged with supporters throughout the entire process. Think about special giveaways or a contest to keep building demand for your campaign and piquing interest in your business. Keep your team active on social media and on the crowdfunding page responding to comments and providing updates about different project stages and important news backers should know about.
Businesses who are smart with their crowdfunding campaigns, build trust with their audiences and leverage the idea of product scarcity set themselves up for fundraising success.
“What is crowdfunding?” is not a complicated question to answer when you boil it down to the basics. Crowdfunding platforms have dramatically shifted the way we raise funds and have made obtaining the type of capital once only available from large firms and loans possible even for those operating on an individual level. When looking at crowdfunding options, choose the methods and platforms that are right for your business and go raise money for something wonderful. Now is your chance to beat the odds.
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