Crowdfunding 101: Is it a Viable Way to Fund Your Business?
Crowdfunding allows entrepreneurs to pitch ideas directly to a potential customer base
You’ve probably come across more than a few Kickstarter campaigns – maybe you’ve even donated a few bucks to a product you believe in and got a t-shirt in the process. Crowdfunding allows entrepreneurs to pitch ideas directly to a potential customer base and, hopefully, raise funds to get their idea off the ground. It may sound too good to be true, but products like the popular card game Exploding Kittens, and the college-kitchen-cornerstone cookbook “Good and Cheap” prove crowdsourcing can propel a big idea into reality.
When it comes to crowdfunding, there are really two options. The first is a rewards-based model, meaning you offer donors an incentive. The other is equity crowdfunding which allows donors to give money, and in turn, legally own a part of your business. Here, let’s focus specifically on rewards-based crowdfunding as it tends to be the better option for small or new businesses.
Crowdfunding can be a great option for some small business owners, but it’s important to consider both the good and the bad that comes with them. Here’s what to consider before you launch that massive crowdfunding venture:
- LOW FINANCIAL RISK
Though crowdfunding sources aren’t always free, they cost less than borrowing money from a lender. Users of a crowdfunding platform can expect to pay a platform fee as well as a processing fee. In most cases, fees are configured as a certain percentage of the amount you raise. Those who donate to your cause don’t receive interest for their donation – they do it because they are committed to your product (and, of course, for the immediate reward).
- POTENTIAL TO SPREAD BRAND AWARENESS
We’re living in the age of viral content. With the right pitch you have the opportunity to create an ad campaign that spreads like wildfire. Not only does your crowdfunding pitch introduce your product to the public, it also serves as an ad that, if you’re lucky, will be shared across the web.
- TRANSPARENCY IS KEY
In today’s market, consumers love transparency. Most crowdfunding platforms make it extremely easy to connect with your donors and offer “behind the scenes” looks into how you’re operating. Consider offering ongoing, exclusive content to those who donate – this allows you to maintain interest in your idea and stay engaged with your customers.
- VALIDATE YOUR CAUSE
Feedback can be scary, especially when it comes to your pride and joy: Your business. A crowdfunding campaign gives you an opportunity to see how the public reacts to your idea before it goes live. It may be a little intimidating, but it also gives you a chance to make tweaks before you launch your business.
- COMMUNITY BUILDING
Crowdfunding can be a fun way to raise money. If you market correctly and create ways for those who donate to your product feel as though they’re a part of your company’s community, you have an opportunity to create a loyal base of customers who will stick with your brand in the future.
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- IT’S NOT FREE
Some crowdfunding sources cost money to launch. In addition to paying fees from the platform you choose, you may want to invest money into creating a pitch video. Though they aren’t necessarily a requirement, campaigns with videos have a drastically higher success rate than those that don’t. Videos that are well made are often the most effective, which means you’ll need high quality filming, sound, and editing.
- A SUCCESSFUL PITCH IS HARD TO CREATE
Putting your idea into words can be tough. Putting your thoughts into the right words to convince donors you’re worth investing in can feel impossible. You want to grab viewers’ attention, give them enough information, but in a short enough time-span that they watch the entire video. Meanwhile, you have to keep them entertained. It’s a lot to juggle – but still completely possible to do.
- PRESSURE TO DELIVER
Once people have donated, the pressure to deliver a product is amplified. Since crowdfunding is a way to build community, disappointing donors could give your business bad word-of-mouth. Plus, some crowdfunding sites require you to reach your full funding goal before you get any money at all – which can add stress and anxiety to the whole process.
- THERE ARE RULES
Most platforms, such as Kickstarter, come with a list of rules and restrictions about the types of products you’re allowed to post. Though this may not necessarily be a hindrance on your specific idea, it’s important to take note of the platform your choose—and what kind of guidelines they post.
- YOU COULD RUN OUT OF MONEY
Say you raise funds in the pre-product stage of your business, but underestimate the costs associated with building your business and providing the rewards you’ve already guaranteed. If you can’t raise funds elsewhere, you risk not delivering on your product and your promise. Once you crowdfund, it’s important to budget your money throughout the process.
Crowdfunding takes a specific type of entrepreneur to be successful. Maybe you’re creative in a different way—or maybe you don’t have the spare funds to invest in filming equipment. If you’re looking for a more concrete way to access the funds you need to bring your idea to life, you’ve got options.
- A BUSINESS LOAN
If you need a significant amount of money, you may want to consider a business loan. These are generally a great option if you’re wanting to undergo a large business-related project, but it can be difficult to get approved if you’re a new business. If you think you won't qualify for a business loan, try working with a lender like Kabbage or OnDeck, whose technology allows for more thorough underwriting to serve a wider base of small business owners and get funds quickly into the hands of business owners.
- A BUSINESS CREDIT CARD
If you aren’t sure how much you need, but you’re looking for some extra working capital, a business credit card is a great idea. Not only will a business credit card give you access to the funds you need, you can also earn rewards as you spend.
Though crowdfunding is definitely an option when it comes to funding an idea, it can be a bit of a gamble and it’s a good idea to be realistic before you start a campaign. If you have a great idea and a creative side, you may have a lot of success by speaking directly to your future customers and asking them to take a chance on your business.