Many companies use crowdfunding as a source of primary startup capital. Before you start vying for capital, read our 6-step guide to...
While our economy continues to change, a recent Huffington Post article cited a lack of money and time are still primary culprits for small business failure. Private equity is also now available to the masses. Crowdfunding allows you to raise capital in a time and cost efficient way.
Two primary types of crowdfunding are available:
- Equity Crowdfunding: Investors expect a financial return. This may include interest payments and shares of ownership.
- Donation Crowdfunding: Social equity is the goal of donation funding. Typical repayments are 'thank you' plaques, product discounts and perhaps one share of ownership.
There are many crowdfunding sites to choose from with broad exposure to countless investors.
You can use each crowdfunding option for the same need. For example, high tech startups can appeal to investors seeking cutting edge concepts on equity sites, such as Crowdfunder or Somolend (Tweet This). The same idea may improve communities, which is well suited for donation funding on Indiegogo or RocketHub.
Despite different objectives, there are common best practices. Here are 6 strategies for crowdfunding success:
1. Understand Fixed and Flexible Funding
Fixed funding requires that a campaign hits goal to collect money. Kickstarter and Fundable are 'all or nothing' sites. Conversely, flexible funding allows you to collect any money raised. Crowdrise and Razoo are examples of this model.
Indiegogogo and Rockethub allow you to choose fixed or flexible campaigns. The general tradeoff is fees tend to be higher with flexible funding. For instance, RocketHub charges 4% for money collected on fixed campaigns or 8% otherwise.
Be sure to fully understand all fees when choosing a site. Most platforms also have fees for payment processing that range from 3 to 5%. Wiring and currency conversion fees may apply if you're courting overseas investors. A weak dollar also affects money raised when converting euros or yen into greenbacks.
- Consider lowering the bogey for fixed funding sites. You can supplement with flexible funding as needed.
- Check for time limits on each platform. FundAnything offers a duration out to 90 days, while GoGetFunding allows ongoing campaigns.
2. Tell a Positive Story
Investors rally behind positive stories. Focus on how funding will help your business thrive. There is no need to rehash struggles with lenders or other woes. Instead, put a compelling spin on your campaign. Different case studies of crowdfunding success share this positive theme.
For instance, your new app may help students connect with tutors for better grades. A chef's gluten free pasta helps allergy sufferers enjoy their favorite dishes.
Does your business have a great reputation? Consider including links to positive reviews that boost your credibility. Investors feel good about helping a struggling company that offers quality service.
- Personalize your story with pictures and videos. This establishes a closer connection with investors.
- Outline how the money will be used to give investors more confidence in your story. A restaurant raising $5000 for equipment may use $3000 for a pizza oven and $2000 for a cheese grinder.
3. Manage Your Expectations
Many campaigns do not hit funding goals. You should plan for alternate sources of capital ahead of time. Crowdfunding can cover shortfalls from business loans, lines of credit and credit cards. Business owners with challenged credit can turn to non-traditional choices such as industry financing, merchant loans and factoring.
High tech ideas enjoy greater response than mundane needs. You should not expect to raise $8000 for a forklift overnight or at all.
- You can use niche sites to improve response. As an example, Appbackr and Quirky are niche platforms to fund mobile apps or inventions (Tweet This Tip).
4. Follow Through on Repayment
Companies should ensure that each investor is paid on time and in full. Even the goodwill of social investors is tested when terms are not met. You risk being barred from the platform or assigned a low rating, which deters future investors. Jilted investors may also use social media to voice their concerns.
- Determine how long it will take to achieve an ROI when picking repayment. For example, it's costly being strapped with interest payments for gadgets that are early in development. You could offer shares of ownership as a practical alternative in this case.
5. Confirm Customer Demand
Market research requires time and resources beyond many small businesses. As a result, some entrepreneurs overbuild products or overdo services. Crowdfunding is a convenient way to confirm demand for your widget or service. You will have confidence bringing a tattoo cream to market if there is strong interest in getting free samples for donations.
6. Proof of Concept
An innovation must also have business value. Facebook and Twitter were abstract ideas that had to show everyday value to investors. Crowdfunding investors vote with their dollars to show your product has practical value. You can leverage proof of concept to raise more venture capital or attract retailers interested in selling the product.
Author bio: Micah Kinsler is the president of a nationally known payment-processing company with multiple streams of recurring revenue as well as operating capital solutions catering to small and medium-size businesses that need funding at BusinessLoansDirect.com