To Crowdfund or Not, That Is the Question
November 3rd, 2015 by Jarrod Norwood
Crowdfunding your business — could this be the way to finance your entrepreneurial dream?
Crowdfunding at its core is the monetization of one’s own extended social and professional network, and most crowdfunding campaigns are funded by family, friends, and acquaintances. The funds derived from crowdfunding can be used to launch or grow your business.
The idea that your product will generate millions of seemingly free dollars with crowdfunding is often propagated by mass media. The media is quick to jump on campaigns like the Coolest Cooler which targeted $50,000 in funding, ran its campaign for 52 days, and collected $13,285,226. Recently, The World’s Best Travel Jacket received $9,192,055 in crowdfunding on Kickstarter. However, the average campaign goal is between $3,500 and $5,000, and the average donation is around $88.22.
The other statistic to consider is that 56% of crowdfunding campaigns fail.
Despite the high failure rate, crowdfunding does have its place in the realm of small business financing. The average successful campaign generates around $7,000. A campaign lasts around nine weeks, and if a campaign can gain 30% of its goal within the first week, it is more likely to be successful. Another interesting statistic is that 30% of people who donate to a campaign do so more than once.
The saying that it’s easier for a small business to get a loan for $100,000 than $10,000 does has some validity. So new start or niche businesses seeking smaller amounts of financing could benefit from crowdfunding.
Social entrepreneurship, which focuses not only on profits but on the businesses’ or products’ positive return to society, is widely supported in crowdfunding. This means that crowdfunding contributors care just as much about who you are, what problem you are trying to solve, and how you plan to make the world a better place as they do about the ROI or net income of your business or service.
Types of Capital
Crowdfunding offers two different forms of capital: equity capital and donation capital. Equity capital is the forfeiture of a certain amount of ownership in your business for a given amount of money. This sort of capital as it relates to crowdfunding is fairly new and has recently gone through regulation by the SEC. The process of acquiring equity capital is similar to that of an IPO done by an investment bank and has many legal and tax implications. Click here for more details about equity capital and crowdfunding.
For the purposes of this article, we will focus on the other type of crowdfunding, donation capital. Donation capital has many names: owner’s capital, crowd capital, donation funds, other income, etc. Perk- or rewards-based crowdfunding is the source of donation capital.
In perk- or rewards-based crowdfunding, contributors donate small to large amounts of money for the benefit of some reward or perk. The perks can vary from a handshake to being an extra in a crowdfunded movie. Rewards-based crowdfunding helps businesses test their market viability and is used as a way to help with product development.
Think of rewards-based crowdfunding as having a focus group of people who are going to buy your product and will let you know what they want the product to do for them. The best part is they are paying you to be a part of that focus group. A major advantage about this type of funding is the owner keeps 100% ownership in the business.
Keep in mind that perks and rewards should be representative of the donation. For example, a reward of an $8.00 T-shirt for a $5.00 donation wouldn’t be cost effective. Also be aware that perks and rewards aren’t regulated by most any of the crowdfunding platforms. This means the responsibility is on the business to deliver the perk or reward. If you don’t follow through with the reward, you may not face legal action, but the crowd could definitely turn against you in the form of poor reviews and defamation of character.
Remember, how your business is perceived is likely just as important as what it does. This means perks need to be well thought out, and the business should sell its ideals and benefit without the use of a perk. Perks and rewards are more like icing on an already delicious cake.
So how do you tap this oasis of money in the desert of startup and small business financing? Well, the same way you would pursue financing of any other sort—with a plan and some videos.
Crowdfunding campaigns that feature videos are 2 times more likely to get funded. Launching a campaign on one of the 1,250 active crowdfunding platforms is not an undertaking that should be taken on a whim. The same sweat, tears, hours, and meticulous planning that you put into your business plan, marketing plan, and business processes should be carried over into your crowdfunding campaign.
Build Social Media Presence
In order to wage a successful crowdfunding campaign, you must first build up your social network. Start by making sure all your current website and social media platforms reflect the culture, atmosphere, and product and/or service you are trying to sell in your campaign. You don’t want anything to contradict your message. Remember, the larger your network, the more people you can reach. The campaign should play to your strengths and should be tailored to your target customer. Similar to your marketing plan, your campaign should appeal to the person that you feel will contribute the most with the least amount of effort on your part.
Choose a Platform
The second thing you have to do is choose a crowdfunding platform. Similar to business loan programs, there are crowdfunding platforms for veterans, minorities, food, fashion, art, even non-profits. You should research the different platforms and see which one complements what you are trying to do the best and on a budget that will work for you. Consider using a crowdfunding platform that has funded a similar product or service.
Promote the Campaign
Lastly, understand your crowdfunding campaign will not fund itself. You must link your campaign to all your online advertising and speak about your campaign at events, church functions, bus rides, or any other venue where you might be able to generate hype. Tell your story, keep it transparent, and remember contributors like to feel like they are part of the business.
Show them where the money will go, and tell them how you plan to make the world a better place. The Coolest Cooler that ultimately received $13 million in crowdfunding actually failed the first time it launched its campaign. The first campaign only raised $102,000 on a goal of $125,000. However, they listened to their supporters, revamped the design, asked people to share their videos, and launched during the summer instead of the winter when no one is concerned about a cooler. The rest is Kickstarter history.
A crowdfunding campaign that is properly planned and orchestrated not only adds dollars to a cause but creates a buzz around the product or service. It invites people to be a part of it, to be stewards of the new idea or product. When it comes to perks or rewards, have a plan to roll them out over the course of the campaign to keep the campaign relevant. Remember to provide something for everyone who contributes, even if it’s a handwritten thank you letter.
Ready to Go
Create a plan of action, get your team together and on the same page, get your current marketing ready, and don’t forget the ASK. The ask should be clear in your video pitch, elevator pitch, social media, or whatever media you choose to market your campaign.
You have to ask for the money both nicely and assertively. While still not a guaranteed source of capital, crowdfunding is growing by leaps and bounds. So if you still feel like crowdfunding is the way to achieve your entrepreneurial dream, then get started on a strategic plan to make that dream a reality. Just remember there is no such thing as free money. A crowdfunding campaign will still cost you time, but it could be well worth the effort.
If you would like to know more about crowdfunding, general business financing, or any other small business questions, please contact your local ASBTDC at 501.683.7700.