Why choose crowdfunding as a small business owner? There’s something very democratic, and wholesomely American, about the idea of crowdfunding. People get to vote for their favorite concepts, play a hand in their community’s destiny, all by choosing where to spend their hard-earned dollars.
Crowdfunding is a vote, a barometer for likely success: Will people click, give and share? Or will they just scroll on by?
Finally, crowdfunding provides a low-cost space to quickly test your business ideas, while supporters can buy in at little financial risk. Rather than go through the slow, arduous process of networking and searching for investors, and applying for loans to bankroll your venture, you can simply craft your appeal, post it online and see if the support is there to get your start-up cash. With the right idea and a compelling campaign, the amount raised can be limitless.
But crowdfunding to launch your business is often easier said than done. Here are some details on what it means, so you can decide if it’s right for you.
Crowdfunding is gaining influence
Posting your idea to the internet and letting the donations roll in is harder than it sounds. According to statistics compiled by Fundera:
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- The average success rate of crowdfunding campaigns is only 22.4%.
- The average number of backers for a crowdfunding project is 47 backers, compared to 300 backers for fully funded projects.
Experts see growth ahead for crowdfunding, so if you haven’t seen much of it in your corner of the world, expect that to change.
According to Statista, in 2018 crowdfunding raised $10.2 billion for American entrepreneurs, and is predicted to more than double by 2025, at $28.8 billion.
Reward your investors
Crowdfunding for business works a little differently than crowdfunding for a cause (like helping a family pay for medical bills). Most people, when they invest in a business, like to get a little something in return. Here are three possible ways to do that.
Crowdfunding swag
People take pride in supporting local ventures and having bragging rights for playing a part. Something as simple as branded swag for supporters who give at the basic level, like water bottles and T-shirts, can give you some feel-good momentum. (Price point can be the equivalent to the cost of the essential product or service, plus the swag expenses.) To inspire bigger donations, level up on the value of the swag.
Crowdfunding equity
Donors who pay in, say, $1,000 apiece can own a share in your company. They get a stake in your business along with an opportunity to see that original dollar amount appreciate in value, while you get start-up money.
Principal and interest
Some crowdfunding sites are micro lenders or peer-to-peer loaning operations, allowing individuals to lend small sums of money to entrepreneurs, with a promise of repayment, plus interest.
Crowdfunding: Best practices and insights
Like anything, there are pros and cons when it comes to crowdfunding to get the start-up cash you need to start your business.
Crowdfunding isn’t a shortcut
Much like meeting with a lender or a panel of investors to get your start-up funding, you need to bring more than a bright idea to the table. When people see evidence of a viable plan, they’ll feel good about giving to you, whether they plan to give $5 or $5,000. Do you have a business plan? Can you justify the expenses? Do you have a site or facilities lined up? Include a compelling bio that shows your energy and personality, along with a bulleted list that details your relevant experience.
Crowdfunding can complicate your plans
The success rate of a fully funded crowdfunding campaign for small business is difficult at best to predict. When you launch, it could succeed beyond your wildest dreams. But then, you may raise zero dollars. If you need to pull the trigger on a site or facility, crowdfunding can create obstacles.
Build a pitch that resonates
Because you’re pitching directly to the consumers, you’ll want to craft a pitch that resonates with people’s emotions. While you’ll want to show off your expertise, keep your messaging warm and human — free of jargon. Think about how the product or service matters to the individual customers, and write your pitch with your target audience in mind.
Tap your network
Even though you’re sending your idea out into the world it doesn’t mean you should opt out of networking. Before you launch, enlist family, friends and professional connections to contribute and help you get your campaign rolling. When people see signs of early traction and support, they’re more likely to climb aboard.
Promote early and often
Share on social media, and plan and schedule your posts so something goes out each and every day. (Don’t forget to thank people publicly for their support.) Create an online flier that you can email to friends and colleagues, ideally with a personal message. Contact your local news organization, whether it’s print, TV or online-based and ask if they’d be willing to do a feature about your project. Anything that gets the word out.
Manage your donors' expectations
The reality of crowdfunding is it’s a lot like accepting a grant. You’re accountable to your donors. That can complicate things, especially if you’re juggling everything else that comes with starting and running a business. So if you’re faced with delays and setbacks, don’t fall into radio silence. Remember what you promised, put reminders in your calendar and be transparent with progress and changes to your venture.
Regroup and try again
Let’s say your crowdfunding doesn’t go as planned. Set the idea aside for a while and take a break. When your emotions settle down, take an honest look at the feedback and responses. If the idea still has a pull on you, don’t give up. Make a detailed list of what needs work before you go back to the drawing board. There are endless stories of successful people in business who found a way to succeed through grit and perseverance.
The final verdict: Is crowdfunding the way to go?
On one hand if you take time to plan, network, monitor and adjust your strategy along the way, you can raise your project’s odds of success. However, it’s also time-consuming and thrusts your venture into the spotlight. If the crowdfunding falls short of its goal, you’ll have invested a ton of time with little (or nothing) to show for it.
Can crowdfunding be one of many funding options? Absolutely. Even if you can’t raise everything you need, crowdfunding can help you leverage a business loan. One, it can shave off some of your start-up costs so you don’t have to borrow quite as much. Two, it shows the lender there’s demand and interest in your type of venture. If it can’t accomplish everything, it can be a part of your financing strategy.
When you’re starting a new business, the specialists at Minnwest Bank are here to guide your financing options. We offer customized options and flexible terms to best meet your business needs. To get started, talk to one of our commercial bankers in your community.
