A Comprehensive Look Into Crowdfunding For Business Startups

Funding Vs Stage

Starting a business can be an exciting and daunting task, especially when it comes to funding. Lately, I have been asked about an increasingly popular way for entrepreneurs to raise funds for their business startups. With the rise of online crowdfunding platforms, it has become easier than ever to connect with potential investors and secure the funding needed to turn your business dreams into a reality. In this blog, I will explore the different types of crowdfunding platforms and funding options, and suggest a step-by-step approach to developing a successful crowdfunding campaign.

Types of Crowdfunding Platforms

There are four main types of crowdfunding platforms, each with its own pros and cons. Here’s a breakdown of each type:

  1. Donation-based platforms are used for charitable or social causes. Investors donate money without expecting any financial return. These platforms are typically used by non-profits and individuals seeking financial assistance for personal reasons.
  • Examples of donation-based platforms include GoFundMe, Fundly, and Kickstarter’s “Community Projects” category.
  • Pros: Donation-based crowdfunding is a great option for non-profits and individuals seeking funding for personal reasons. It is also a good way to raise awareness for a cause.
  • Cons: Donation-based crowdfunding is not ideal for businesses seeking funding for a startup or project as investors do not receive any financial return.
  1. Reward-based platforms are used for creative projects and startups. Investors receive a reward or perk for their contribution. Rewards can range from a thank you note to a pre-order of the product or service being offered.
  • Examples of reward-based platforms include Kickstarter, Indiegogo, and Patreon.
  • Pros: Reward-based crowdfunding is a great option for creative projects and startups. It allows entrepreneurs to test the market and generate buzz before launching their product or service.
  • Cons: Offering rewards can be expensive, and there is no guarantee that investors will receive their rewards if the project is unsuccessful.
  1. Debt-based platforms are used for businesses seeking loans. Investors receive interest on their investment, making it similar to a traditional loan. These platforms are typically used by small businesses and startups seeking alternative sources of funding.
  • Examples of debt-based platforms include Kiva, Funding Circle, and LendingClub.
  • Pros: Debt-based crowdfunding is a good option for businesses seeking loans without having to go through traditional lenders. Investors receive a return on their investment in the form of interest.
  • Cons: Debt-based crowdfunding can be risky as there is no guarantee that the borrower will be able to pay back the loan.
  1. Equity-based platforms are used for businesses seeking investment in exchange for equity in the company. Investors receive a share of ownership in the company and are entitled to a portion of the profits.
  • Examples of equity-based platforms include SeedInvest, StartEngine, and Crowdfunder.
  • Pros: Equity-based crowdfunding is a good option for businesses seeking funding without having to give up control or take on debt. Investors receive a return on their investment in the form of equity.
  • Cons: Equity-based crowdfunding can be expensive, and there is no guarantee that investors will receive a return on their investment if the business is unsuccessful.

Steps to Developing a Successful Crowdfunding Campaign

Now that you have a better understanding of the different types of crowdfunding platforms and how to choose the right one for your business, let’s take a closer look at the steps involved in developing a successful crowdfunding campaign.

Step 1: Define Your Goal

The first step in developing a successful crowdfunding campaign is to define your goal. How much funding do you need? What will the funding be used for? What is the timeline for the project? It’s important to have a clear and concise goal that is easily understandable to potential investors. Knowing whether you plan to pitch to local community members or like-minded entrepreneurs worldwide will inform your campaign’s style and goals. At this stage of the planning process, you want to conduct market research to assess your competition.

Step 2: Choose a host platform

Before you begin your crowdfunding campaign, it’s important to choose the right platform for your funding needs. Here are some factors to consider when choosing a crowdfunding platform:

  • Type of funding needed: Choose a platform that offers the type of funding that best fits your business needs.
  • Fees: Consider the fees associated with each platform, including platform fees and payment processing fees.
  • Audience: Choose a platform that has a large and active audience that is likely to be interested in your project or business.
  • Reputation: Choose a platform with a good reputation for quality projects and successful fundraising campaigns.

There are many options for new and established companies looking to source crowdfunding. I have already mentioned Kickstarter, a reward-based platform for creative concepts, and Indiegogo, which is geared toward elevating technology projects. SeedInvest is a popular site for startups looking to gain traction and funds. Another well-established platform is StartEngine, which hosts debt and equity crowdfunding projects.

Limiting your campaigns to a certain time frame can help drive momentum and create a fear of missing out that compels investors. Not all crowdfunding efforts are time-limited, though. One ongoing crowdfunding host is Patreon, where creatives and content creators can build committed memberships of supporters. These supporters pay a monthly subscription fee in exchange for exclusive content and access to their favorite creators.

Step 3: Create Your Pitch

Your pitch is the heart of your crowdfunding campaign. The most successful crowdfunding projects have a strong narrative behind them. Be sure to enlist the help of talented storytellers throughout your campaign. The more you can compel possible investors through background information, foundational research, and appealing multimedia content, the more likely you will reach your fundraising goals. I like to think of an expanded elevator pitch that starts with a “hook” that catches the audience’s attention followed by the story and concludes with the call-to-action. Your pitch should include:

  • A brief overview of your business or project;
  • The problem your business or project solves;
  • Your unique value proposition;
  • Your funding goal and timeline;
  • The rewards or perks you’re offering to investors;
  • A call-to-action

Make sure to keep your pitch concise and easy to understand. Use images and videos to help tell your story and make your pitch more engaging. 

Step 4: Set Your Funding Target

Setting the right funding target is crucial to the success of your crowdfunding campaign. You want to set a target that is achievable but also reflects the true cost of your project. Be sure the goal for your crowdfunding project covers the total cost of your effort and any fees or commissions your funding platform charges at the end of your campaign.

Step 5: Choose Your Rewards or Perks

Offering rewards or perks to your investors is a great way to incentivize them to contribute to your campaign. Make sure your rewards or perks are appealing and valuable. Offer a range of rewards at different contribution levels to appeal to a wide range of investors.

Step 6: Develop Your Marketing Strategy

Marketing is key to the success of your crowdfunding campaign. You need to get the word out about your campaign to as many people as possible. Develop a marketing strategy that includes social media, email marketing, and other promotional activities. Reach out to your personal and professional networks and encourage them to share your campaign with their networks as well.

Step 7: Launch Your Campaign

Once you have all the pieces in place, it’s time to launch your crowdfunding campaign. Make sure to keep your investors updated throughout the campaign with regular updates and progress reports. Be responsive to questions and feedback from investors.

What if You Don’t Reach Your Funding Goal?

Unfortunately, not all crowdfunding campaigns are successful. If you don’t reach your funding goal, don’t give up hope. You can try running another campaign with a different pitch, rewards, or funding target. Alternatively, you can explore other funding options, such as traditional loans, angel investors, or venture capital.

Pros and Cons of Crowdfunding for Startups

Crowdfunding enables business owners to reach investors of all backgrounds, from supportive neighbors to curious venture capital firms. It uses the internet and social media to amplify an idea, which can boost a project that may otherwise have limited reach. This unconventional method of raising capital can help entrepreneurs reach audiences outside their existing social, professional or geographic circles.

Conversely, crowdfunding can be a significant risk. While your project may pique investors’ interests, funds may not be available unless you reach the full campaign goal. Bear in mind what sort of cut your investors — and hosting platform — may require once you reach your fundraising goals. If significant equity or fees are required once fundraising is complete, your bottom line may be impacted.

The Bottom Line

Crowdfunding is a powerful tool for entrepreneurs seeking funding for their business startups. By following the steps outlined above and choosing the right platform and funding type for your needs, you can develop a successful crowdfunding campaign and turn your business dreams into a reality. Be sure to do your homework on the front end, ensuring your effort is unique enough from any potential competition. You will also want to research your hosting platform to ensure a good fit and your funding goals to ensure they are realistic and worth the effort. You may need to pay back crowdfunded contributions, depending on what kind of campaign you run.

If you are planning to start a business or are thinking about scaling an existing one, be sure to read the ebook “Real-Time Strategic Business Planning: A Guide to Optimizing Your Business for Maximum Success”. It is an essential book for business owners, managers, and entrepreneurs looking to leverage real-time insight to improve their business operations. Learn how to develop a comprehensive business plan, assess risk and opportunity, and create an actionable roadmap for success.

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Copyright ©John Trenary 2023. All rights reserved.

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