Starting a business requires a hefty sum of money. Depending on the nature and size of the business you want to start, you might have to shell out thousands or millions of dollars to take your business idea off the ground.
While some people have the resources to provide capital on their own, others don’t. If you belong to the latter, then starting a crowdfunding campaign can be a great option. As long as you have a funding goal, you can use a crowdfunding platform to finance your business.
What Is Crowdfunding, and How Does It Work?
Crowdfunding is the practice of raising capital from a large number of individuals, namely relatives, friends, family, and individual investors, in order to finance a new business venture. You can use different social media and crowdfunding platforms to gain access to thousands of investors who can see, contribute, and share your campaign.
For you to run a successful crowdfunding campaign, you need to implement strategies that capture a large number of backers and persuade them to invest in your campaign. This can be a challenging task, given that many businesses use crowdfunding today.
There are four basic types of crowdfunding campaigns, namely:
1. Equity-Based Crowdfunding
Under the equity-based crowdfunding model, you’ll be giving a portion of your business to backers in exchange for their funding. Often called investment crowdfunding, backers receive shares or equity from your business based on how much money they contribute in starting it.
The individuals who donated money for you to start up your business will now become shareholders of your company.
2. Reward-Based Crowdfunding
The reward crowdfunding model is the practice of giving something to your backers in return for their donations. Some aspiring entrepreneurs and business owners will use this crowdfunding model for raising capital and will give rewards depending on the amount of the contribution given by the donor. Some of the most common rewards you can give to your donors under this crowdfunding model are t-shirts or products at a discounted rate.
Donation-based crowdfunding is one of the most common crowdfunding models used by aspiring entrepreneurs today. Under this model, backers who donate to your crowdfunding campaign won’t get anything in return.
Debt-based donations work like peer-to-peer lending, wherein the money pledged by the backer to donate to your business becomes a loan and must be repaid with interest. The process of this crowdfunding model is similar to the traditional model of acquiring loans from banks and other financial institutions.
Although all of the four crowdfunding models allow you to gain money to support your business, you need to be careful in which model to choose. You can only run a successful crowdfunding campaign if you have the resources to keep your side of the bargain after backers contributed money for your business.
What Are the Pros and Cons of Crowdfunding?
Crowdfunding can be a godsend for aspiring entrepreneurs who are clueless on how they can raise money for their business startup. However, crowdfunding isn’t all good because it also comes with several drawbacks. If you plan on using a crowdfunding model to jumpstart your business, it’s vital that you’re well-aware of both its pros and cons.
Here are some of the pros of crowdfunding:
1. Lesser Financial Risks
Money is one of the most important resources when you start a business. You need to be cautious on how and where you’ll spend your money because making hasty or uneducated decisions can prevent your business startup from operating.
Facing lesser financial risks is one of the biggest advantages of crowdfunding. Through this model, you’ll be able to present your idea to crowdfunding investors and to the general public and determine if that idea is saleable or not. This market validation will prevent you from spending money on materials and developments for ideas that aren’t appealing to the masses.
Using a crowdfunding campaign to test the waters is a better and cheaper idea than funding an unproven business idea.
2. Increased Reach
With the number of businesses operating today, you need to make sure that yours reaches thousands or millions of people. It’ll be easier for you to sell products and services if the general public is already aware of the existence of your business startup.
Another advantage you can experience when you use crowdsourcing is being able to increase your reach. Since crowdfunding can be done online, your campaign can easily reach crowdfunding investors and even target audiences that you’d be unable to reach using traditional marketing mediums.
As long as you use the right crowdfunding platform and highlight your brand, your campaign might even go viral online. The popularity of your crowdfunding campaign can become your ticket to becoming a successful entrepreneur!
3. Raises a Lot of Money
One of the most obvious reasons why aspiring entrepreneurs create and market crowdfunding campaigns is because it allows them to raise a lot of money. According to statistics, the average successful crowdfunding campaign is $7,000 and lasts for around nine weeks, though longer campaigns can take place.
By implementing the right strategies in creating an effective crowdfunding campaign, you can also earn the same amount of money, or even more!
Before you start creating your own crowdfunding campaign, however, you should also consider the cons of the model, which are:
1. Requires Resources
When you start your own crowdfunding campaign, expect that you’ll have to shell out many of your resources to guarantee its success. Regardless of the type of crowdfunding you’re going to use to earn funds, you’ll still have to exert time and effort to create appealing videos, write high-quality content and market your campaign to many different platforms online.
In some cases, you might also have to invest thousands of dollars to build prototypes to prove to backers how scaleable your business idea is.
2. Risk of Losing Your Idea
The ability of your crowdfunding campaign to reach thousands of individuals worldwide can become a two-edged sword. Sure, this campaign can help you attract backers who will make equity investments or debt investments to your business startup, but the accessibility of your crowdfunding model can also become the reason why other people can easily steal the ideas you have for your business startup.
Even if your idea is protected with copyrights, patents, and trademarks, someone can steal it and make it their own. In worse cases, these individuals might even have more resources to make your idea into a reality or turn it into something better. When this happens, you might see yourself fighting a legal battle.
3. Not Applicable To All Businesses
Starting a crowdfunding campaign might seem convenient for many aspiring entrepreneurs but keep in mind that this isn’t the be-all and end-all solution to your financial woes. In fact, crowdfunding campaigns aren’t applicable to all types of businesses.
When you start a crowdfunding campaign, you need to display your products online to convince crowdfunding investors that they can get something once they put up money for your business. If your business startup involves selling tangible products, such as clothes, footwear, and home decors, displaying these on your crowdfunding campaign can be easy.
However, if your business startup is service-oriented, like a painting or catering business, convincing crowdfunding investors to finance your endeavor can be challenging. You won’t have any tangible items to show backers in your crowdfunding campaign, making it tough for you to prove the feasibility of your business idea.
How Do You Know if Crowdfunding Is Right for Me?
As mentioned, crowdfunding can help you earn a lot of money to finance your startup, but this model doesn’t apply to all businesses. Statistics show that the average success rate of crowdfunding campaigns is 22.4%, with an average of 47 backers.
Before you create a campaign on a crowdfunding site and come up with a fundraising goal, you need to determine if crowdfunding is right for you. This will prevent you from wasting time and effort in creating a crowdfunding campaign and then, later on, realize that taking this direction isn’t best for you.
Answering the questions listed below can help you determine whether crowdfunding is right for you:
1. Do you have a robust plan?
Starting a business is a long-term process that requires a robust plan. It’ll be challenging for you to attract an investor or any kind of backer who will contribute to your crowdfunding campaign if you don’t have a plan on what to do with their money once you receive it or how your startup business can succeed in the industry.
If you have a robust plan that can answer all of the questions that a potential investor might have about your startup business, then crowdfunding might be ideal for you. On the other hand, if you don’t have any yet, it’s best if you come up with one before you even think about being a campaign creator on a crowdfunding site.
2. Do you have a valuable offer?
Unless you’re going to ask for donations through a crowdfunding site, expect that backers will expect a valuable offer from you before they’ll contribute money to your fundraising goal. Crowdfunding campaigns are common today, and backers will always choose to invest in a campaign that will also benefit them.
As a campaign creator, your crowdsourcing campaign should involve a valuable offer. You need to think outside of the box to attract as many backers as possible. Creativity is key in this phase for you to convince backers to entrust their money to you.
3. Do you know how much money you need?
Crowdfunding campaigns are usually created to help aspiring entrepreneurs raise funds for their creative projects for their startup businesses. However, you can’t simply launch a generic crowdfunding campaign and start asking backers for money from them.
Money is vital for every individual and business — and even the richest investor would like to know the amount of money you need to attain your fundraising goal and how you’re going to manage this resource once you’ve achieved that goal.
Crowdfunding is right for you if you’ve already gone through long hours of research, budgeting, and number-crunching to determine the amount of money you need. If you still haven’t gone through this process, it might be best to delay your crowdfunding campaign and work on your financial plan first.
4. Do you know how to attract your target audience?
Convincing backers that you have a plan for your startup business is one thing and making sure that your target audience supports your business is another. The latter is a prerequisite because you won’t be able to return the investment that backers made through your crowdfunding campaign, whether it’s in the form of debt, equity, or rewards.
Before you create a campaign on a crowdfunding site, understand what your target audience wants and needs first. You should also know what channels or campaigns are appealing to them, so you won’t have any problems persuading them to donate to your campaign and patronize your offerings in the long run.
5. Are you ready to invest time and effort in the campaign?
Maximizing a crowdfunding site to raise money for your startup business is convenient, but this doesn’t mean that this platform will always guarantee your success. Even having a unique business idea isn’t enough for your crowdfunding campaign to be successful.
As a campaign creator, you should be ready and willing to invest significant time and effort to create and market your crowdfunding campaign. This task will require you to spend long hours making informative videos, engaging with users, and sharing different types of content. You’ll also have to learn and implement SEO strategies when you become a campaign creator.
If you’re willing to invest all of these resources just to ensure the success of your crowdfunding campaign, then you’re ready to create one.
6. Do you understand the financial limitations of crowdfunding?
One of the biggest mistakes aspiring entrepreneurs make when using a crowdfunding site is to create a campaign right away without fully understanding the limitations of the platform. Sure, a crowdfunding campaign allows any content creator to earn money, but different sites have different regulations that can affect your ability to dispense the money you’ve collected.
When you start a Kickstarter project through its website, for example, you need to understand that you won’t be able to get the money you’ve raised unless you hit 100% of your fundraising goal. Other platforms will also take a certain percentage of your collected funds as payment for using the platform, and some carry heavy implications on the management of your business’s equity.
If you’re going to use any crowdfunding site, it’s vital that you understand its unique financial limitations. Regardless of how minor these limitations are, these can still impact your business in the long run.
Once you’ve answered “yes” to all of the questions listed in this section, then using crowdfunding to finance your startup business is the best way to go. This platform can become your ticket to finally turn your business idea into money-generating revenue!
How Do You Start Crowdfunding?
Starting a business will require a large sum of money, which is why starting a crowdfunding campaign is ideal for aspiring entrepreneurs. This platform allows you to find donors who can finance your startup business and eventually become your business partners.
But, since there are countless content creators today, it’s vital that you know how to properly start a crowdfunding campaign and stand out from the platform. You need to make your crowdfunding campaign appealing so you can persuade backers and finally start your startup business.
If you’re still clueless as to how to start crowdfunding, the tips listed below will surely help:
1. Choose the Right Crowdfunding Platform
Starting a crowdfunding campaign is no longer new. In fact, many businesses wouldn’t exist today without crowdfunding. The number of businesses using this platform is one of the reasons why there are now a handful of crowdfunding websites to choose from today.
The first step you should take when starting a crowdfunding campaign is to choose a platform. All crowdfunding websites will enable you to create campaigns for you to attain your funding goal, but each has different financial limitations. Some websites will only dispense your funds once you’ve reached 100% of your funding goal, while others will allow you to collect your funds regardless of the amount.
Aside from the financial limitations of each crowdfunding website, it’s also important to assess the fees that will be deducted from your funds. This information will help you budget your finances better and determine which crowdfunding website suits your funding goals.
2. Pitch Your Business Idea
After you’ve selected the best crowdfunding website for your startup, it’s now time to think about your pitch. The business idea you’ll pitch in your crowdfunding campaign is vital to your success because it affects the decision of donors whether to invest in your startup business or not.
Regardless if you’re planning to pitch your business idea through video or writing, keep in mind that you need to consider several factors first. Listed below are some tips for you to get the best responses from your pitch:
- Get personal: For your crowdfunding to be appealing to donors, you need to get personal and show them who you are, what motivated you to create this project, and what makes your business different from others. Providing this information on your crowdfunding campaign will make your business more relatable and evoke emotions from your target audience.
- Share your mission: Donors will only support your crowdfunding campaign if they have a clear idea of where their money is going and how your project will impact their lives, and others. Provide this information to them by sharing your mission through your crowdfunding campaign.
- Prioritize transparency: Money is an important resource for individuals and businesses, which is why a lot will hesitate to support your funding campaign. Make it easy for them to trust you by being transparent in your crowdfunding campaign. This means that you should let them know why you need their money to finance your project and how their money will be spent once you receive it.
3. Promote Your Campaign
Crowdfunding campaigns are common today, which is why it’s never enough to promote yours on one crowdfunding website only. The fewer platforms you use for marketing your crowdfunding campaign, the fewer donors you’ll attract. If you use a crowdfunding campaign saturated by household brands, you might not even gain any potential backers.
When starting a crowdfunding campaign, don’t forget to exert effort in promoting it. This is essential to ensure that you can inform the general public about your business idea and how you need their financial help to finally start the operations of your startup business.
For you to effectively promote your crowdfunding campaign, take note of these tips:
- Use social media: Utilize social media to spread the message about your crowdfunding campaign. Make sure to include a direct link to the campaign when you post on social media so donors can easily visit the platform and make donations.
- Work with influencers: Reach out to influencers on social media and let them cover your crowdfunding campaign. Working with influencers is always a great way to promote your crowdfunding campaign as these individuals have built strong relationships with their followers. Influencers are trusted individuals in their specific niche, and their followers will likely support their promotions because trust is already established in their relationship.
- Start a live event: You can also host a live event on social media and other online platforms to increase awareness and drive engagement. Just make sure that you inform them of the live event ahead of time to attract more viewers.
Start With a Plan
Starting a crowdfunding campaign on the right crowdfunding site can help you earn money to finally start your business. If you’re lucky, your crowdfunding project can even open opportunities for you to engage with different target audiences, market your offerings, and network with other players in the industry.
However, to ensure that you end up with a successful crowdfunding campaign, you need to create a funding goal first and an action plan to achieve that goal. Crowdfunding allows you to connect with countless investors worldwide, but keep in mind that they will only finance your startup business if they see that it’s something worth their investment.