Have a brand new idea for your business? Just need a little bit of financing to get things started? Crowdfunding is becoming increasingly attractive way for startup businesses and mid-size companies to raise money. It seems so very easy – create your project on a crowdfunding platform, detail your needs, wait a bit and you’ve already raised money.
It’s achievable to find backers for a wide variety of projects, campaigns, or products. The world is full of people eager to support new ideas, concepts and products, or who want to help for small businesses to grow. Of course, raising money for your business via crowdfunding isn’t that easy. Like any marketing or fundraising campaign, it requires a sound strategy and solid execution.
Let’s break down what is it all about. Crowdfunding has created the opportunity for entrepreneurs to raise huge amounts of money from anyone with money to invest. It makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together, and has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.
As keap.com points out, there are four basic forms of crowdfunding. Each kind attracts its own set of donors, each has its own set of rules, and each offers unique benefits to your small business:
- Reward-based: This type of crowdfunding offers backers a reward for their investment. If they’re backing a prototype product, donors at certain levels could get early access to buy at a discount, or have the bragging rights to own the product itself before their friends. Rewards aren’t limited to company products. Rewards could be tchotchkes, like tee shirts. The rewards can be as wild as you want to make them: backers could get a brick in the foundation with a message stamped on it, or a handwritten thank you note. To get a sense of what can work and how far you can stretch the limits, search for small businesses in your field that are using crowdfunding and see what they’re doing. Most crowdfunding sites will show each tier of rewards and which tiers are selling out fastest, giving you a good sense of the most common investment amount and respective reward.
- Equity-based: The SEC recently ruled that you can use crowdfunding to offer backers an equity stake in your business. This has the potential to rival traditional venture capital. Thus the SEC has taken a keen interest in the mechanics and growth of this new revenue stream. Be aware: If you intend to launch an equity-based campaign, ensure that you understand the rules. This one is a little more complicated, and if you intend to pursue this kind of funding, investigate it very carefully with the help of a qualified financial consultant.
- Lending-based (aka debt-based, or crowd lending): This can be a great way to secure a loan because it can offer a lower interest rate and more flexibility in the terms. Investors in this form of crowdfunding seek equity in the business they’re investing in, which makes it similar to but subtly different from equity-based crowdfunding. In equity-based crowdfunding, investors take shares of your business with the hope that those shares will grow in value over time. In lending-based crowdfunding, investors expect a fixed return on the shares they hold. This one’s complicated, too, so as with equity-based funding, you should be sure to investigate it very carefully with the help of a qualified financial consultant.
- Donation-based: If your organization is a registered nonprofit, you can use crowdfunding to raise donations. A charitable organization, like a homeless shelter, could, for example, raise funding for an upgrade to their kitchen facilities. Among the rewards, you can offer a tax-exemption for the donations and the feel-good appeal of helping a non-profit succeed.
If you’re interested in raising money for your business via a crowfunding platform, we kindly invite you to a workshop Crowdfunding for sustainable brands: step by step on 25th of June at BWorking Coworking Spaces. During the event João Pedro Pio from PPL Crowdfunding Portugal will explain the steps of creating a crowdfunding project, focusing on how you can avoid mistakes to succeed in creating your campaign.