Crowdfunding for business: A comprehensive guide to raising capital and building your brand
Key takeaways:
- Crowdfunding is a viable alternative to traditional funding (loans and personal funds).
- A successful crowdfunding campaign requires careful planning and execution.
- Crowdfunding offers benefits other than fundraising, such as building customer relationships and increasing brand awareness.
Crowdfunding is becoming an increasingly popular method of raising funds by businesses, be they startups or established ones.
This comprehensive guide elaborates on crowdfunding for businesses, its aspects, benefits, and potential drawbacks. We’ll also give you actionable tips and strategies on how to start crowdfunding and successfully launch a campaign.
What is crowdfunding for businesses?
Crowdfunding is a fundraising method that leverages the power of people, mainly through the internet, to raise money for a particular project or venture.
Unlike other fundraising channels, such as business loans or venture capital, it allows businesses to connect with potential investors and supporters who give small amounts of money toward a larger funding goal.
Aside from raising that much-needed capital, crowdfunding helps develop community and engagement around your business. It also lets you validate your business idea and build early relationships with potential customers.
Step-by-step guide: How to do crowdfunding for business
Launching a successful crowdfunding campaign takes proper planning and promotion. Now that you’ve learned about the different types of crowdfunding, let’s get to the basics of how to do one.
Here’s a step-by-step guide for you.
1. Define your funding goal and campaign timeline
The first step is determining the amount of money you need to raise. To do this, assess financial requirements, product development, marketing, and overhead running costs. It’s important to set a realistic funding goal to show potential backers your project’s feasibility.
Once you know what your goal is, you should have a timeline for your campaign. This includes the start and end dates, along with some key milestones and deadlines. Of course, the span will depend on the platform’s guidelines and your marketing plan.
2. Choose the right crowdfunding type
Choosing the right model of crowdfunding also plays a key role in making your campaign consistent with your business goals and the investors’ expectations. Think about your company’s stage, the kind of financial support you need, and your risk appetite.
You can choose from the following types of crowdfunding for small businesses.
Rewards-based crowdfunding
Rewards-based crowdfunding involves offering backers non-monetary rewards in exchange for their contributions. This model is suitable for businesses with tangible products or services, allowing them to pre-sell their offerings and generate excitement among early adopters.
Kickstarter and Indiegogo are popular platforms for this type of crowdfunding.
Equity crowdfunding
Equity crowdfunding allows backers to receive equity shares in the company in return for their investment. This is ideal for businesses seeking early-stage capital without incurring debt or losing control.
SeedInvest and Wefunder are popular platforms for equity crowdfunding.
Debt-based crowdfunding
Debt-based crowdfunding, also known as peer-to-peer lending, involves borrowing money from individuals and repaying it with interest. This model is suitable for businesses with a proven track record and the ability to repay the loan.
LendingClub and Prosper are popular platforms for debt-based crowdfunding.
Donation-based crowdfunding
Donation-based crowdfunding is primarily used by non-profit organizations or businesses with a social mission. Backers contribute without expecting any financial return.
GoFundMe is a well-known platform for this type of crowdfunding.
Some of these crowdfunding channels are more applicable for different business setups. For instance, equity-based crowdfunding might suit a startup seeking seed funding. On the other hand, rewards-based crowdfunding is good if you’re an established business looking to launch a new product.
Carefully evaluate the pros and cons of each crowdfunding type to determine the best match for your business needs.
3. Select the best platform for your business needs
Crowdfunding platforms differ in their strengths, weaknesses, and target audiences. Compare various popular options (as mentioned above) based on their features, payment processing fees, and suitability.
This would also mean considering the platform’s audience demographics, campaign requirements, and success rates. Some only attract specific niches, while others have more general categories.
4. Create an engaging campaign
Achieving success with your fundraising efforts requires an enticing campaign page. Develop a very compelling campaign page that describes your business and what value proposition it offers. High-quality visuals, images, and videos all go towards giving a better view of the product or service.
In addition, create a narrative that resonates with your intended audience and points out the problem your business solves. A good story will make your campaign more appealing and persuasive.
5. Promote your campaign
While a crowdfunding campaign can help you raise funds, don’t rely solely on it to attract backers. Plan a proper marketing strategy that reaches your target audience and generates interest in your project. Create awareness using social media platforms, email marketing, and other channels.
Also, consider collaborating with influencers or partners to expand your reach and tap into new networks. Effective promotion can help improve your campaign’s visibility and attract more potential investors.
6. Monitor and engage with backers throughout the campaign
Once your campaign is live, monitor its progress and adjust it whenever necessary. Observe key metrics such as the number of backers, funds raised, and engagement on your campaign page. Use this data to determine areas for improvement and update your campaign strategy.
Also, maintain open communication with your backers. Address queries immediately and update them from time to time with your campaign’s milestones. Saying thanks every now and then and keeping them informed makes them more connected to your project.
Pros and cons of crowdfunding
While crowdfunding has many advantages for raising funds, it’s also important to know its potential drawbacks.
Benefits
- Access to capital. Crowdfunding provides an alternative for business owners, especially those unqualified for traditional loans or venture capital. It opens doors to various investors, such as angel investors, allowing businesses to access otherwise unavailable capital.
- Market validation. A successful crowdfunding campaign can validate your business idea in the marketplace. It demonstrates that there is genuine interest in your product or service and proves that people are willing to invest in your vision. This validation can be invaluable when seeking additional funding or partnerships.
- Early customer engagement. Crowdfunding lets you connect with potential customers early on and build a loyal community around your brand. Through engagement with backers during the campaign, you can establish relationships with your earliest supporters and learn their preferences and expectations.
- Brand building and increased visibility. A well-executed crowdfunding campaign can generate media attention and increase your brand’s visibility. It can help you reach more people and establish your business as an innovator in your industry.
Drawbacks
- Platform fees and associated costs. Crowdfunding websites normally charge service fees, which eat into the funds that you raise from your campaign. These fees also vary depending on the website as well as the type of crowdfunding you are using for your campaign. Some other associated costs include marketing, payment processing fees, and much more.
- Risk of failing to meet funding goals. If your campaign doesn’t reach its funding goal, you may not receive any funds and lose momentum in your project. This puts you at a major disadvantage, especially if you’re a startup that relies on crowdfunding to launch your ventures. Setting realistic funding goals and developing a comprehensive marketing strategy is important to increase your chances of success.
- Effort required for marketing and campaign management. Running a successful crowdfunding campaign needs time and effort to create content, promote your project, and engage with backers. You’ll need to create compelling campaign materials, engage with potential backers, and respond to inquiries right away.
Best crowdfunding platforms for businesses
Choosing the right crowdfunding platform is important for your campaign’s success. Here are some of the best crowdfunding sites for business startups.
Kickstarter
Kickstarter is one of the most widely used rewards-based crowdfunding websites suitable for creative projects, product launches, and innovative ideas. It boasts a large community of backers and offers robust campaign management tools.
Kickstarter has been known to produce successful campaigns and is considered a great outlet for businesses that want to be creative and innovative. It also has a friendly interface and other resources to create compelling campaigns for businesses.
Indiegogo
Indiegogo is another rewards-based crowdfunding platform that offers more flexible funding models and a variety of campaign types. With many categories to choose from, it suits a wide range of businesses.
As Indiegogo is global in reach, businesses can easily attract diverse potential backers. It also offers several promotion options to maximize the visibility of a campaign.
GoFundMe
Primarily focused on donation-based crowdfunding, GoFundMe is the go-to platform for personal causes, charitable organizations, and social impact projects. It’s popular for its ease in setting up campaigns.
GoFundMe has an excellent reputation for its social impact and has helped to raise billions of dollars for various causes. It’s simple to create and manage campaigns on the platform.
Patreon
This crowdfunding site serves creators and artists, helping them establish a recurring membership base through ongoing support from fans. It’s great for businesses that create content, community, or exclusive experiences.
Patreon enables businesses to engage with their most loyal fans and raises recurring revenue streams. It offers membership tiers as well as rewards that encourage fan support.
Fundable
This platform focuses on both rewards-based and equity-based crowdfunding, which makes it fit for various businesses. It has tools and resources, including campaign management and customer support to guide businesses through crowdfunding.
Fundable also highly emphasizes business crowdfunding, which allows businesses to connect with individual and institutional investors.
StartEngine
StartEngine is a leading equity crowdfunding platform that helps startups access accredited investors who can fund them in exchange for equity shares. The services it provides give a streamlined process for capital raising and guides businesses towards legal and regulatory compliance.
Common crowdfunding mistakes and how to avoid them
Even with careful planning, crowdfunding campaigns can encounter pitfalls. Here are some common mistakes to avoid:
- Setting unrealistic goals. Setting a funding goal that’s too high or too low can hinder your campaign’s success. Research similar projects and set a realistic target that aligns with your project’s scope and market demand.
- Poor campaign planning or presentation. A poorly planned or presented campaign can fail to capture the attention of potential backers. Invest time crafting a compelling campaign page with clear messaging, high-quality visuals, and a strong value proposition.
- Insufficient marketing and promotion. Don’t depend solely on the crowdfunding platform to promote your campaign. Develop a solid marketing strategy that uses social media, email marketing, public relations, and other channels to reach your target audience.
By avoiding these common mistakes and following the best practices in this guide, you can run a more successful campaign and achieve your fundraising goals.
Kickstart your business with crowdfunding
Crowdfunding has redefined how business owners raise capital, providing another option for them when starting their venture. By carefully planning your campaign and choosing the right platform, you can use crowd support to realize your business vision.
If you’re looking to launch your crowdfunding campaign with a professional website, tap into us at Domain.com. With our website design services and available domains, you can build a well-designed website to boost your campaign and reach a wider audience.
FAQs about crowdfunding for business
Contributions may be treated as taxable income. This, again, depends on the type of crowdfunding and circumstances involved. For tax advice regarding a crowdfunding campaign, seek the assistance of a tax professional.
Yes, crowdfunding can be used for service-based businesses, although it’s more commonly associated with product-based businesses. To attract backers, you can offer rewards such as early access to your services, exclusive consultations, or customized packages.
The outcome depends on the crowdfunding platform and funding model you choose. Some platforms operate on an all-or-nothing basis, where you only receive the funds if you reach your goal. Others allow you to keep the funds raised even if you fall short, but they may charge higher fees.
While crowdfunding can expose your idea to a large audience, there are ways to protect your intellectual property. You can file for patents or trademarks, use non-disclosure agreements, and carefully control the information you share on your campaign page.