Should you crowdfund?

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?”

Crowdfunding for business is sourcing money – usually via online means – from a group of people. By reaching a large number of individuals, those doing the crowdfunding can 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 for business efforts run the gamut, financing everything from independent films to research and even life-saving medical treatments.

At the heart of modern crowdfunding for business is the desire to create possibility. 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 try and at least make the effort 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 just 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.

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How does crowdfunding work?

Before going into the advantages of crowdfunding, 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 simple 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 – and here’s why that’s important.

Advantages of crowdfunding for businesses

Being able to raise 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.

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 for business attractive to those business owners who have been burned by single investors or partners before and have a difficult time trusting those who could harm their venture.

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Opportunity to connect

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When you look at how crowdfunding works and why crowdfunding has become popular, you have to take into consideration that both the funder and the business or cause being funded benefit. Crowdfunding for business allows you to connect deeply with the potential customers of whatever field you’re in. If you’re a writer, you can reach potential readers; filmmakers can tap directly into future moviegoers. Crowdfunding for business platforms provide the opportunity for a unique type of advertising: You can present your full story to your potential investors. You can 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.

Polishing your presentation

Every entrepreneur launching a new product or service needs to have a pitch or presentation that he or she can use to succinctly describe their project to others. When you use crowdfunding for business, you can polish your presentation by getting a look at what you offer from the top level. Because you need to address history, marketplace, your offerings, value proposition and more before you launch a crowdfunding campaign, you have everything ready for future presentations. It also allows you to make tweaks early in the process before you have your marketing and branding set in stone. 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.

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Improving your marketing efforts

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When you fully take advantage of crowdfunding for business, you can leverage media and marketing in your favor. 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 for business is a perfect avenue to tell that type of tale.

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 for business is that you get to present your concept to huge numbers of people and get their feedback early in the game. Just as you can tweak your marketing efforts and presentation skills, crowdfunding for business also allows you to address holes in your business 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 for business lets you discover what that life looks like.

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Fundraising efficiency

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At the heart of how crowdfunding for business works is efficiency. When you can streamline and focus your fundraising efforts, you can 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 for business: when you can easily get your message out to thousands of people, your funding results explode.

Drawbacks to crowdfunding

Just as with any endeavor, there are drawbacks as well as advantages to crowdfunding for business. 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 for business 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 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 for business

What is crowdfunding if not a multifaceted opportunity to choose the platform that best suits your project? That’s why crowdfunding for business is 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:

Donation

This is the most well-known type of crowdfunding for business 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 offer 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.

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Reward

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The next step up from donation-based crowdsourcing is reward-based crowdfunding for business. 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 on offer. For example, 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 for business tool and can be a very effective business growth strategy.  

Debt crowdfunding

Compared to the two methods described above, debt crowdfunding for business 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 entrepreneurs who are not comfortable asking for outright donations.

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Equity crowdfunding

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Equity crowdfunding for business 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 for business strategy for investors to donate is tied to the success of the business; if your company does well, then their equity is worth more. If your company 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.

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 small businesses 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 for business options, choose which methods and platforms are right for your business and go raise money for something wonderful. Now is your chance to beat the odds.

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