Securing funding from traditional lenders has become increasingly difficult for many small-business owners. Banks are under a lot of pressure to make good loans, and that pressure trickles down to entrepreneurs.
Fortunately, in the past year, the amount of small businesses with crowdfunding campaigns has significantly increased, proving it’s a viable alternative funding option. A 2015 report from Massolution, a research firm specializing in the crowdsourcing and crowdfunding industries, shows 41 percent of all crowdfunding capital raised last year was for business and entrepreneurship. And while there are billions of dollars being exchanged on crowdfunding platforms, a 2015 survey by Manta found that only 3 percent of small-business owners had funded their business through crowdfunding. More than 30 percent of the small business owners surveyed said they would consider crowdfunding if they knew more about it, so for these small-business owners considering alternative funding options, here are four basic things to know when getting started.
1. Rewards vs. equity: Select the right type of funding and platform for your goal.
There are hundreds of crowdfunding sites, so take the time to visit several sites and browse projects similar to yours to find the platform that’s right for you.
Rewards-based crowdfunding offers incentives to backers based on how much funding they commit to a project. Incentives vary based on the project being funded, often including special pricing, access to exclusive events or new products.
Equity-based crowdfunding offers a percentage of the company to lenders in exchange for cash. In an equity exchange, you are selling a portion of your business in return for funds. This is a big step for many business owners, so if you are considering equity-based crowdfunding, it’s a good practice to have your attorney and accountant review your plans.
Fee structures apply to both crowdfunding types. Fees vary sharply, but success fees are the most universal. A success fee is a percentage of the total amount of funding secured and only applied if you meet your funding goal. Depending on the platform, the cost usually runs between 4 and 10 percent. It’s important to note that some crowdfunding sites also charge carried interest (i.e., equity interest) on top of a success fee. As always, when researching crowdfunding platforms, make sure you weigh all the factors thoroughly, including fee comparisons.
Related: Which Crowdfunding Method Should You Choose for Your Startup? (VIDEO)
2. Plan ahead and solidify your vision.
The challenges of crowdfunding are similar to those of marketing. In fact, crowdfunding is best considered an extension of marketing, so plan on investing heavily in strategy and creative asset development, such as business plans and campaign videos.
Remember, there is no crowdfunding without a crowd. You must have a strong vision and voice for your company to get people excited about your project. This requires a concerted effort to grow your network. Presenting a polished, professional campaign is key to gaining the trust of would-be backers.
3. Listen to your network and respond to feedback.
Think of your funding campaign as an opportunity to test market demand. Use this time to validate your market, refine your offering and test messaging. The crowd members who care enough to offer feedback and make suggestions are not only your best customers; they’re your biggest brand advocates.
4. Think about the long term.
During your campaign, focus on connecting with the crowd and getting to know your customers. Your investment in building a strong network is just as vital to your long-term success as their monetary investment in your project. Remember, you’re cultivating more than a crowd of backers; you’re creating brand champions.