Crowdfunding your business: an entrepreneur’s guide

What’s crowdfunding?

Crowdfunding is, quite simply, getting small amounts of money from many people.

Within that broad definition, there are a lot of variables. Individuals and organizations can crowdfund, and there’s practically no end to the list of projects that can be crowdfunded. You can find crowdfunding campaigns for medical care, legal services, smartwatches, card games, technology companies, and activewear.

For the purposes of this post, we’ll be talking about how entrepreneurs can use two specific subcategories of crowdfunding to get working capital for their business:

• Reward-based, where people pledge money in return for a specific award.
• Equity-based, where people pledge money in return for equity in a company.

Benefits of crowdfunding for businesses

Crowdfunding gives you a diverse group of potential investors

Instead of trying to appeal to angel investors or venture capitalists (who are disproportionately wealthy, white, and male), you can get investments from anyone who has a little money to contribute. This can be a benefit if your team or your target market is very different from the average VC or angel investor. You can also run a successful crowdfunding campaign almost anywhere, while most venture capital investments go to a handful of specific cities.

Crowdfunding lets you fund your business without debt

Debt isn’t all bad, but it’s got a long list of potential cons. It can be hard to qualify for a business loan, and the associated costs (interest rates and miscellaneous fees) are high. You might have to use your personal assets (your house or investments) as collateral for the loan, and if you’re not able to repay the loan you stand to lose those assets. Crowdfunding allows you to get money for your business without these risks and costs.

Crowdfunding allows you to test your idea in the market

To run a successful crowdfunding campaign, you have to create a product or business model that many people find compelling and appealing. This is obviously true for rewards-based crowdfunding (where you’re basically signing up customers before you make the product), but it’s true for equity-based crowdfunding as well. People won’t back a campaign unless they believe in the business and the product, so crowdfunding can help you get feedback, market research, and publicity as well as funding.

Is crowdfunding the right fit for your business?

Crowdfunding is a great option, but it’s not the right solution for every business. If you’re considering crowdfunding, here are a few questions to think critically about:

• Is your product simple and charismatic enough that people will want to buy it after reading a couple of paragraphs or watching a short video?
• Do you have a clear target market? Will you be able to offer them something compelling in return for their investment?
• Do you have relatively modest funding goals? Some crowdfunding campaigns are wildly successful but 72% of Kickstarter campaigns raise less than $10,000.
• Do you have the resources (time and starting funds) to run a successful crowdfunding campaign? Crowdfunding is a lot of work — rather than pitching your product to a handful of investors or convincing one lender, you’re working with hundreds or thousands of potential backers.

If the answer to all of these questions is yes, you might be a good fit for rewards-based crowdfunding. The requirements for equity-based crowdfunding are a bit more lengthy and complex, so we’ll go over them in more detail below.

Additional considerations and steps for equity-based crowdfunding

A lot of the criteria and steps for running an equity-based crowdfunding campaign are similar to rewards-based crowdfunding, but you’re working with a different target market and a few added complexities. The potential rewards are much greater, though — the average successful equity-based campaign earns over $225,000.

The first difference to keep in mind is that equity-based crowdfunding is more complex and regulated than rewards-based crowdfunding. For example, there are regulations that govern how much money you can raise and what reporting requirements you need to meet. There are also limits on how much each investor can contribute to certain companies. Plan on doing extensive research and possibly hiring an attorney to navigate the requirements.

Another difference to remember is that the top equity crowdfunding platforms are competitive and there’s no guarantee that they’ll accept your application. For example, SeedInvest only approves 1% of the campaign applications it receives. Plan on carefully researching the top platforms (this article is a good place to start) to find the right fit for your business.

Finally, think about your target market and the rewards you’re promising them. When you’re running an equity-based crowdfunding campaign, your product is your business and the reward your backers want is return on their investment. To be successful, you need to show potential investors that …

Your business model is profitable

Investors will want to know how you’re going to earn revenue and what your costs and margins will look like. They’ll also want to know that there’s a market for whatever you’re selling. Ideally, you’ll already be offering a successful product or service by the time you start your campaign. If not, then you should have compelling, credible market research.

Your offering is unique

Unique businesses — those that offer something that no one else is offering — are appealing to investors because there’s less competition and more potential for growth.

Your team has what it takes to succeed

You need to show investors that you and your team have the skills and experience to run a successful company. Think critically about what your team offers, and then capitalize on it — maybe you or one of your partners played a key role in a successful startup in the past, or maybe you’ve recruited top-tier talent from one of the major players in your industry. Create a narrative around what your team offers and how you’ll succeed.

Your business is financially healthy

This one is counterintuitive, but investors typically feel comfortable giving money to businesses that don’t need the money right away. If your business has carefully-managed cash flow and ample reserves, investors will feel more confident that your business will survive and succeed (and ultimately earn them a return on their investment).

There’s a way out

Potential investors will want to know when, and how, they might be getting a return on their investment. Are you planning to sell the business, go public, or get other investors down the road? You don’t need to have an exit plan yet, but your business does need to have exit potential.

How to run a successful crowdfunding campaign

Some folks make crowdfunding look effortless, and there are a few campaigns that get lots of funding without much apparent planning or work. That said, most crowdfunding campaigns aren’t successful. You can dramatically increase your chances of achieving your goals with some careful planning and preparation. Here’s a list of the key steps to take:

1. Research everything. Start by reading a few comprehensive guides on crowdfunding, but don’t stop there. Find examples of other campaigns (both successful and failed) that are in a similar industry or appeal to a similar target market, and study them to see what worked and what didn’t.
2. Choose your crowdfunding platform. The two biggest are Kickstarter and Indiegogo, but don’t overlook smaller platforms like Patreon (for artists and creative businesses) and PledgeMusic for musicians. Bigger platforms typically mean a bigger audience, but it also means competing for visibility.
3. Figure out what rewards you’ll be offering. Getting backers for a campaign is different — and harder — than getting people to buy a product you’ve already created. You are asking people to give you money for something that doesn’t exist yet. You’re asking them to be patient and take a risk in order to support you, so you have to give them something compelling in return. To give you some ideas, here’s a list of 25 unique and appealing rewards you could offer.
4. Build your online presence. A basic website, a handful of blog posts, and a social media presence will make your business look credible and professional. It will also help you build a network and start generating interest in your product even before you launch the campaign.
5. Make a video. Data shows that Kickstarter campaigns with a video have a 50% chance of being successfully funded, while campaigns without videos have a 30% success rate. If you want to do a deep-dive into the data on crowdfunding videos, Videopixie analyzed 100 crowdfunding videos to see what type of video you’ll need to hit specific funding goals.
6. Reach out to your network and start to generate interest. Start sharing your website with family, friends, and other contacts. Encourage them to share it with their networks, too. If you have a personal blog, post about it. If you participate in a community (online or in person) that’s relevant, see if you can share it there. Start creating an email list of potential backers. You can also talk with bloggers and journalists to see if they’re interested in writing about your business.
7. Launch your campaign, and take a moment to breathe. Continue talking with your network and potential press, and stay on top of questions and comments from interested backers. You might also decide to run a few ads to increase awareness.
8. Remember that the end is just the beginning. Once you run a successful campaign, you need to deliver on your promise to your backers. You’ll also want to stay in communication with them and keep them updated as you work on fulfillment. If you handle this step right and keep your backers happy, you will build credibility and establish a group of loyal fans. That’s why a lot of companies that run a successful crowdfunding campaign go on to run another … and another ..and another. For example, tabletop game company CMON has created 33 highly successful Kickstarter campaigns to date and they show no signs of stopping.

To sum things up

Crowdfunding promises entrepreneurs the opportunity to get resources for their business based on the merits of their ideas and their work — no matter where they’re located, who their target market is, and what their team looks like.

It can live up to that promise, as long as you realize that a good idea (though crucial) isn’t the only thing you need to succeed. As Thomas Edison said, “Genius is 1% inspiration and 99% perspiration.” If you’re prepared to do the research and put in the work, crowdfunding might be exactly the jumpstart your business needs.