You have likely have seen crowdfunding campaigns, micro-efforts to boost funding to support a special project, development of a game or film, or to support a family in a moment of crisis.Using popular platforms like Kickstarter, Indiegogo, or GoFundMe, crowdfunding taps into the power of volume. With many smaller contributions, crowdfunding aims to raise large amounts of money from many people.
As seen in the recent article, From Business Concept to Funding: Why Successful Entrepreneurs Think Differently, creative thinking about funding is an important trait for small business owners to hone.
Should you try crowdfunding for your small business? There is no one clear-cut answer. Instead, it is better to gain a clear understanding of how crowdfunding works before deciding if it is the route for you.
Businesses create crowdfunding campaigns for all kinds of reasons: to expand operations, to launch a new product, or to construct a new facility. Most crowdfunding sites require a business to set a monetary goal that needs to be reached within a certain timeframe.
Promotions then draw visitors to the business crowdfunding page. There, donors can contribute to the effort. In some cases, crowdfunding projects will attract donations by offering special perks for contributions of different sizes. For example, a $100 donation may get a personal phone call from the owner and a $250 donation may get a donor a special code to pre-order a product at a discount.
Crowdfunding sites usually take a percentage of the total contributions to the project. In some cases, if the business does not reach the stated goal, it receives none of the donated funds, which are returned to the donors.
There are several advantages to crowdfunding as a business funding option, including:
- No loans that need to be paid back to investors
- Wide outreach to many potential investors and customers at little cost
- Free feedback on the business concept
- Pre-funding future products
A newer crowdfunding option is to offer equity in the company in return for donations. These sites tend to attract larger venture capitalists and angel investors who can provide larger sums of investment dollars. However, these platforms usually require increased transparency on the part of business owners, who will need to share financial statements and business plans to potential investors, just as they would in in-person meetings.
Downsides of Crowdfunding
However, there are downsides to crowdfunding, which should be considered before choosing this type of funding for your small business.
With traditional crowdfunding options, the business owner is under considerable pressure to meet the goal. These sites are public, so a failure to meet a financial goal can be an embarrassing byproduct of an unsuccessful campaign.
To be successful, a business needs to spread the word via word of mouth, friends and family members, and social media about the crowdfunding opportunity. This usually involves multiple messages sent on multiple platforms and can take up a lot of time for small dollar amounts.
Is Crowdfunding Right For You?
If you are considering crowdfunding, here are some questions to consider:
- How marketable is your product or service? You need to be able to get across the value of what you are selling in a short amount of space and time. Does your business translate well to the crowdfunding model?
- Do you have the support of a large network of friends and family? Successful crowdfunding campaigns often hinge on networks of networks getting the word out on your behalf. Your funders are also your promoters.
- Do you have the time to commit and the resources to spend on making a crowdfunding campaign successful?
- Will a failed campaign have a negative effect on your company or its reputation?
- Can you set a realistic campaign goal for a compelling reason for people to give?
- What have similar companies done in their crowdfunding campaigns? Have they been successful?
Crowdfunding is indeed a unique way to use technology to drive dollars to your business. However, for many businesses, it may not be the right choice.
Fortunately, there are other options that can create more productive results with no public exposure. At Benetrends, we help companies leverage existing 401(k) and IRA funds to accelerate the launch or growth of a new business. To learn more about how Benetrends can help your company, download Innovative Funding Strategies For Entrepreneurs today!