Do you have the greatest business idea but having trouble finding startup capital? Crowdfunding could be your perfect solution for getting cash to a start a new product or project, or to finance the growth of your existing business. It’s becoming increasingly popular as an alternative way of business financing.
Crowdfunding is still a well-kept secret to an alternative way to fund a business. It’s a solution I’d strongly advise you to try. Having been involved with crowdfunding projects myself, I have seen how to get approved as well as how you fail!
What Is Crowdfunding?
Many people still don’t know what crowdfunding is or how to get it started. In a nutshell, crowdfunding is basically small donations or loans made by many different investors. You fund your business using other people’s money (OPM).
Crowdfunding is about raising small amounts of money from many people, as opposed to raising large amounts of money from just a few people.
Crowdfunding is normally done via the internet and is a form of alternative finance.
The crowdfunding model revolves around three different types of participants. These participants
- The company or person who starts the crowdfunding campaign (you, the business person).
- The people who are investing in the campaign.
- A crowdfunding platform which acts as a mediator, that also guides you along the way.
As someone new to crowdfunding, it might seem like a strange way to fund your business. At first, it might even seem difficult to you. But the truth is crowdfunding can be one of the easiest ways to get funding for your product or project.
It can also be one of the most difficult ways to fund your business if you do it wrong!
You can start a crowdfunding campaign online and you never have to step foot in a bank. From start to finish, everything is handled online. This can save you a lot of time.
In addition to being fairly easy to set up, crowdfunding is not bound by the same regulatory requirements that a 506(C) offering carries. This means that there will be less red tape for you. As you already know, the fewer hoops you have to jump through the better.
While crowdfunding can be easy to set up, getting people to fund your campaign can be difficult. The key to success is finding the right crowdfunding platform and preparing the right marketing plan.
How did crowdfunding start?
Crowdfunding is not a new idea. In fact, it has been around for many years but just not in its modern day form.
In the year 1997, a large group of music fans got together online and donated money to pay for the UK band Marillion to go on tour in the US. Fast forward to current times and crowdfunding has taken on a different form.
There are dozens of crowdfunding platforms that will do much of the leg work for both the investor and the person starting a campaign. In addition to lower restrictions on who can invest in crowdfunding projects, the rule also allows companies to advertise their campaigns freely.
This is a big change from the days where
Difference between Crowdfunding versus 506(C)
When the 506(C) rule was put into place, it set the stage, opening the door for crowdfunding. We can say that the 506(C) rule laid the foundation for the less restrictive crowdfunding rules. This change would allow smaller investors to invest in projects as long as they follow a few guidelines.
The Differences Between Different Types of Crowdfunding
There are four different forms of crowdfunding which could help you raise money for your next big idea.
1. Donation-Based Crowdfunding
Donation crowdfunding is probably one of the most common type out of the four. In this instance, people or the crowd as they are often referred to, give money to support a cause or project.
Donation-based crowdfunding is best-suited to raise money for a non-profit business, a charitable cause, a private person, or a
This type of crowdfunding must be a gift from the donor. You cannot sell shares of any company.
A great example of this type of crowdfunding is when a non-profit organization like the little league sports team raises money for new uniforms. People who give money to most of these types of crowdfunding campaigns expect nothing in return for their money. They are simply supporting a cause that is near and dear to their hearts. The only thing that they do get in return is a good feeling knowing they have helped.
2. Reward-Based Crowdfunding
This is another crowdfunding type that is growing in popularity among businesses, such as product-development businesses. Reward based crowdfunding allows the crowd to give money and in return they get something special back.
Often these people are given first access to products or discounts on the products they have help to start. This can be a very quick way to fund your project without having to pay investors directly back. Instead, you offer an incentive to anyone who donates their hard-earned cash.
As in donation-based crowdfunding you are not selling shares of your company.
3. Debt-Based Crowdfunding
Debt-based crowdfunding is probably one of the least known forms. However, it can be a great opportunity for you. When you take part in debt-based crowdfunding, you are basically taking loans from the crowd.
People pool their money together to give you a loan. You pay the loan back over time with a preset interest rate.
These small loans need to be repaid to the crowd at a certain date. Almost always the crowd will receive a small amount of interest on the money they have loaned out.
This method can be a great way to raise a lot of money fast. Being a loan-arrangement, not only will people feel more inclined to give you their money, but they will also benefit from the process from the interest they earn.
4. Equity-Based Crowdfunding
Equity based crowdfunding is a little different from the rest, and it came into scene a little later, in April of 2012. While not as popular, it can be a great way to get your project or product up and running!
It allows you to sell shares of your business to investors online. Buyers expect a financial return of their investment.
Thus, this form of crowdfunding allows those investing in the campaign to own a part of the company. Many companies will sell part or all its shares to the crowd in order to raise funds.
This gives those investing money something to not only look forward to, but also, they will possibly turn a profit. The crowd in this case is paid back in the form of dividends.
Not only is this form of crowdfunding good for the company, but it also is great for those looking for an alternative way to invest their money.
Why It Is Important To Choose The Right Platform For Your Business
There are tons of different crowdfunding platforms out there but all of them might not be the right fit for your business.
In order to get the maximum benefit out of your crowdfunding campaign, you will need to go with one that supports your project. FOR example, the crowdfunding platform Kickstarter has a wide range of categories to choose from.
This is perfect for someone with a great idea that wants to get it off the ground. However, you may need to choose a platform that is more focused on your particular project type.
In this example, you might want to go with a platform like Fundable that specializes in small business crowdfunding. Basically, the more focused the platform, the better the results you will see. Remember, you have to appeal to a certain crowd of people that are interested in your business in order to succeed and avoid failure.
How To Find the Crowdfunding Site Best Suited for Your Project
As discussed there are quite a few crowdfunding websites out there. When searching for the best one suited for your funding needs I’d suggest you first learn about each one that you research (do your due diligence), and then choose which one(s) you want to initiate contact with. If you are in doubt as to which crowdfunding type will best position your company for the likelihood of successful funding I’d suggest you consult the professional at the crowdfunding engine you choose to talk to.
Be aware that some crowdfunding sites are industry-specific. For instance, do you need funding for a creative project? Kickstarter.com may be your answer.
Do a Google-search of current crowdfunding sites to find a big selection of crowdfunding engines. If you have an industry-specific funding need, then add the name of your industry to the crowdfunding sites Google search. Carefully study what each crowdfunding site offers.
Here are two small business crowdfunding engines that are generally considered to have a good reputation in the industry:
StartEngine is an amazing crowdfunding opportunity for small business. Investors from all over the world come to StartEngine to find projects that they are interested in investing in.
A great place to raise funds for just about any small business idea is Indiegogo. This site is not niche specific and you can raise money quickly here with a wide range of different campaign types. The great thing about this platform is that it does not require you to meet your goal. For those who do not meet their goal, there will be a 9% transaction fee. If you do meet your goal, the transaction fee is much lower at only 5%.
Getting Approved The Step-By-Step Process
Now that you know more about crowdfunding, it is time to get the ball rolling on your campaign. Below you will find a step-by-step guide that can help you secure those
Each crowdfunding site has their own procedures for their process. But here is a general step-by-step list of things you should be prepared for:
Find The Right Crowdfunding Platform
The first step in your crowdfunding journey is to find the right platform. Make sure when choosing a platform that it fits your needs. Also, make sure that the crowds that are attracted to the site is interested in what you have to offer.
Once have figured out which website is best for your small business needs, you will need to sign up. This process doesn’t take a very long time and you can get started building your campaign right away!
Tell Your Story
Now that you have signed up to a platform, it is time to tell your story. You should make this as interesting as possible as well as fun. While you want to provide investors with plenty of details about your cause, you should not ramble on too long. Instead, get to the point in the first few paragraphs and remember to keep things focused on your idea or product.
Offer Great Rewards
To entice the crowd to give you money, you may want to offer some rewards. Rewards are a great way to make people feel like part of the team and they will be more likely to give more.
After you have your campaign up and running, you should share it with the entire world. Utilize social media to help spread the word about your cause and the people will come!
The Investor’s Perspective
Last but certainly not the least, you need to take the investor’s perspective into account. In order to attract investors to your CF project, you will need to reassure them. He or she probably has a few questions that they are asking themselves about your project and crowd funding in general. Below you will find a few important questions that you should always have answers for.
What Is In It For Me?
Let’s face it, anyone that sinks their hard earned dollars into to a CF project is going to want to expect something in return. While your CF project may not require you to pay any of the money back to investors, you will have to give them something. For example, you may offer VIP access to the product your are producing. In this case, investors would get access to your product before the general public. Also, you can offer major discounts to investors who pitch to help get your project off the ground.
How Easy Is It To Invest?
Most crowdfunding websites make it easy for someone to invest in your project. However, some investors are not familiar with how crowdfunding works may find the process difficult, or just difficult to trust as
Is My Money Safe?
Every investor will ask this question before handing over any money. This is why it is so important that you choose a crowdfunding platform that is trusted and well-known. Doing so will ensure your investor’s money is safe and sound.