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Crowdfunding Considerations for Your Small Business

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By Debbie Gregory.

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There are different types of crowdfunding.   One of them, rewards crowdfunding, has been characterized as the new seed-funding.  Most people think of Kickstarter as the crowdfunding model, with money donated for specific projects or products, often with a reward as “payment”

There are other effective types of crowdfunding including equity crowdfunding that involves selling partial company ownership through online sites.  There is also peer-to-peer lending that is crowdsourced loans from lenders that are not financial institutions.

If you are considering the reward and donation crowdfunding for your small business, below are some things to consider:

  1. What is the Right Platform for You?

It is important to select the right platform especially with hundreds of them available.  As with any business decision, it makes sense to do some research selecting from the best crowdsourcing sites that have proven track records in your business industry, that offers similar incentives.  Additionally, it is important to find one with the right user demographics. The most popular sites are Kickstarter and Indiegogo, but there are others that might be a good fit as well.

One very important consideration is whether your company gets the money raised even if it does not meet its goal. Some platforms allow companies to access any money raised while others follow the all-or-none model. The latter can be devastating if the campaign does not hit its target, so this is a very important consideration.

  1. What Are the Fees of the Platform?

Each site has its own fee structure. Sometimes that fee is different if the campaign fails to meet its goal. You should expect to pay 5% to 10% of funds raised just to use the site, plus credit card processing fees.

  1. How to Structure Donation Perks

In the reward crowdfunding model, the funder often is given a perk in exchange for the donation. This can be a certificate, such as a virtual pat on the back, or multiple products when they are finally manufactured.

Rewards and shipping can easily eat into your proceeds. It certainly is possible to lose money on rewards, especially if the campaign does not reach its goal. Additionally, do not underestimate the amount of time needed for reward fulfillment and tracking.  This is time that might be better spent on marketing or development.

  1. Before the Campaign is Live

It can be time consuming to raise money on crowdfunding sites.  Before the campaign begins, your company should clearly define its goals and develop a professional-looking video explaining how the money will be used and details about the project or product. This should also be clearly written out in the campaign text.

Next, develop a list of potential funders to target and begin publicity early. The campaign should not come as a surprise to those who already know about the company. It is imperative that in addition to current customers and friends, you must include industry influencers and media that can help spread the word and possibly contribute as well.

  1. What to do During the Campaign

Once the campaign is live, the fundraising work continues full force throughout the duration. You can use social media to keep awareness up as well as email updates to current and potential funders. People are more willing to back a campaign that starts out successfully than one that lags, so the initial push should be huge. Please do not underestimate the amount of time required after the campaign is over to fulfill rewards and stay in touch with donors. The reputation of your businesss is on the line.

Crowdfunding can be an exciting and public way to announce a new venture and raise money for it. With this said, many campaigns fail, so it’s important to be ready to focus the time and energy needed to make the campaign a success.   VAMBOA wishes you great success.  Please stay tuned for the next article in this Crowdfunding series on the VAMBOA blog.

Crowdfunding Can Help Your Small Business

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By Debbie Gregory.

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Many VAMBOA members have been inquiring about Crowdfunding.  VAMBOA, the Veterans and Military Business Owners Association has decided to do a series of articles on Crowdfunding on our blog for our members and audience.

VAMBOA works very hard to provide valuable information and this is our goal.  We hope that you will enjoy these articles.  If any members have had direct experiences with Crowdfunding, please contact us and share your experiences.  You can do this by emailing info@vamboa.org.

You might have a great new business idea, but raising money for it can be difficult, and that can slow the momentum of your venture. The main obstacle may be the amount of money you need. Large sums of capital may be intimidating to investors, especially when it comes to an untested, early-stage company.

Crowdfunding is when businesses, organizations, or individuals fund a project or venture with small donations from many people. By receiving the necessary boost to cash flow, these ventures can get off the ground or launch new projects, products, and divisions.  Please do not take Crowdfunding for granted because it has raised billions of dollars for many businesses and organizations.

Thanks to the Internet, an alternative for entrepreneurs seeking investment money has emerged and is thriving. Crowdfunding allows businesses to pitch their ideas to a potentially vast audience via websites designed to connect them with investors.  An additional major advantage is that crowdfunding helps to secure investment dollars without relying on one source. Instead, businesses may aggregate smaller amounts from a few or many different individuals and small groups.

For these so-called retail investors, the payoff is the chance to learn about investment opportunities that were formerly limited to bigger banks, private equity groups and venture capitalists. They can get involved with as little as a few dollars and possibly be part of the next Apple or Facebook.   The opportunities with crowdfunding are unlimited.   It is important to understand it and do it right.   We hope to provide you a vast amount of information in this series of articles on Crowdfunding.

Small business crowdfunding has quickly become a viable trend over the last few years.  It has been made popular by many startup stories of success especially in the high technology sector.   A California based manufacturer in virtual reality headsets raised $2.4 million on the crowdfunding site, Kickstarter.  This company was later acquired by Facebook for $2 billion dollars.

According to Massolutions, a research firm, there are now more than 600 crowdfunding sites worldwide.   The World Bank estimates that crowdfunding will generate close to $100 billion in investments worldwide this year

Crowdfunding offers special incentives in exchange for donations. These perks can include and not be limited to anything from a mention of your name in credits on a film to a chance to obtain a free product or to hear personally from an author. By offering these perks, you can also avoid lending fees, interest payments and giving away company equity in exchange for the loan.  You may want to check out these types of details with your accountant or CPA.

The transparency of crowdfunding can be attractive to potential investors.  Companies are making their financial information, strategies, and goals readily accessible on crowdfunding platforms.  This helps potential contributors feel comfortable being a part of business crowdfunding.

Preparation will increase the likelihood of success. For entrepreneurs who want to use crowdfunding for their small business, building momentum before they post their ideas on a site is important. That means creating a good pitch for their business that will engage investors as well as inform them.

It is important that prior to presenting your venture on a crowdfunding site, make sure there is a demand for your product or service.  Next, determine the best way to market it. Clearly communicated evidence of potential demand is more likely to draw interest from investors. Some initial marketing outreach can create the sort of buzz that investors prefer to see as they analyze different crowdfunding pitches.

Start by building a lead capture page that is a standalone page providing basic information about your small business prior to the launch of a crowdfunding campaign. Some successful launches include enticing offers, such as a contest, to get users to input their email addresses.

Other good advice is not to get too greedy when you set up your funding goal.  Even if $500,000 will make your launch easier, aim for a smaller amount that you can reach early on and that will still help you.

This is important, because reaching financing milestones is another way to help attract other investors and to create momentum around your venture. Once your business starts thriving, you may garner the attention of a wider audience that may enable you to raise money in subsequent rounds of funding and, ultimately, increase sales.

Happy Crowdfunding to you and stay tune for the next article in this series on the VAMBOA blog.

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