How To Crowdfund A New Business

• How To Crowdfund A New Business License
• How To Crowdfund A Business

• By Andrew DePietro
• April 30, 2020
• 6 min read
• Advertiser Disclosure

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How to Crowdfund Crowdfunding bypasses normal business financing avenues in favor of asking the public for funding. Learn how crowdfunding can help you gain the capital to start a successful business. Crowdfunding is an increasingly popular way to fund a business. According to Fundable, this method has enabled more than one million startups to raise over $3.2 billion. Brooklyn-based Bitter & Esters, a store for homebrewers to learn beer brewing techniques and purchase equipment, used crowdfunding to get off the ground.

In the gig economy, you can crowdsource almost anything. From formal crowdsourcing, which often involves droves of freelancers doing data, writing or design work, to informal crowdsourcing, which might involve someone asking for recommendations or information on Facebook, millions of people reach out to one another on a daily basis to crowdsource information and money.

You can do the same if you need funding to get your new business idea off the ground. Using crowdfunding to acquire capital to launch startup companies has become very popular in recent years. As this method of funding matured, more and more options have emerged. Read on to find out how to fund your startup business using crowdfunding.

What Does Crowdfunding Your Startup Mean?

Crowdfunding literally means turning to a crowd of people and asking them to provide financial support to fund your new business. For instance, you could put the call out on social media or email or even regular mail, to many of your acquaintances, asking everyone to pitch in $200 to fund your startup. Alternatively, the method that has become especially popular is that you use a platform such as Kickstarter to connect with thousands of people online who can contribute any amount, big or small.

How you crowdfund, and the scope of the crowd you seek, depends on your goals, your financial needs and what you have to offer your donors. Your method of crowdfunding can also depend on whether your business offers products versus services. Some crowdfunding platforms work better for service-based startups and others are better for product-based startups. Ultimately, the way you market your idea and get people to believe in it is among the most crucial factors.

Also: How to Fund Your Business Using Angel Investors

Crowdfunding Models for a Business

The basic models for crowdfunding platforms fall into certain categories. The major models are donation-based, rewards-based, lending-based, pre-sales-based models and equity-based. Each one of these models has shared features but also key differences. Here’s a look at the major forms of crowdfunding:

• Donation-Based Crowdfunding: This is the most basic and straightforward method of crowdfunding a project. It works based on philanthropy and knowing that donors’ money goes toward a good cause. Pure donation-based crowdfunding is mostly associated with charitable projects through platforms like GoFundMe, but they can be business projects as well.
• Rewards-Based Crowdfunding: This model works by supporters choosing the size of their contribution and then receive special perks in return, based on the concept that more money contributed means the greater reward. For the investors, the process works more like making a purchase, though they understand their goods may not arrive for quite some time.
• Pre-Sales-Based Crowdfunding: Similar to the rewards-based model, contributors receive the finished product in exchange for the money they give. However, unlike the rewards-based model, there is a fixed price based on market value and production costs, rather than the contribution size being determined by the investor. Thus, to do this type of crowdfunding, you’ll need to do some thorough homework to determine market value and costs before you can accept contributions.
• Lending-Based Crowdfunding: Also called a debt-based model, this includes what is classified as peer-to-peer lending. With P2P lending, the crowd can fund multiple microloans based on a specific set of terms. Debt models may also come with other agreements, such as a timeline on when the company or product will be launched. If the timeline isn’t met, you may have to pay back the funds. One thing to note about peer-to-peer loans is that they’re not contract-based like standard loans, so the legal guarantees are a little difficult to secure.
• Equity-Based Crowdfunding: Also called investment-based crowdfunding, this model allows for interested parties to get equity in the companies they contribute to. Investors know they won’t receive any return unless the business sees a profit or you sell it. Equity models typically contain rules on what power investors might have and how their ownership of the business will be handled. Crowdfunding via equity isn’t the same thing as going public with a corporation, though.

A key point here is that, like with so many other things, there’s no one right answer. Each method of crowdfunding has its own advantages and disadvantages. The right crowdfunding fit for your business is naturally heavily dependent on your company, your proposed project, service or product and your funding goals.

Read This: 7 Fears Entrepreneurs Need to Overcome

How to Choose the Right Crowdfunding Platform for Your Startup

To choose the right option you need goals and plans. The rewards model works well if you have an interesting product idea people can get excited about and share with others. The debt and equity models may work better for business ideas that are solid and offer a good chance of return but aren’t as exciting for the consumer.

Some crowdfunding sites you can use include:

• Kickstarter: The king of rewards-based crowdfunding; you’ll have to meet your fundraising goal before you receive funds
• Indiegogo: Rewards-based crowdfunding for unique or innovative ideas
• Fundable: Investors and private citizens funding business ideas
• Crowdfunder: Connects entrepreneurs with equity investors
• Patreon: Subscription-based crowdfunding that works for writers, artists and publishers

There are more crowdfunding platforms out there, so you should do your homework beyond just these. Always remember that, despite many similarities, each platform has its own rules and stipulations. Some allow you to miss your funding goal but take whatever you’ve amassed. Other platforms, if you miss your goal, don’t allow you to keep any money. Thus, read the fine print with every platform you investigate.

What Are the Benefits of Crowdfunding Your Business?

Crowdfunding has numerous benefits. First, you don’t need a credit history or even good credit. You don’t need a traditional business plan and all the due diligence required by banks. You also don’t need to fulfill requirements like time in existence as a business and amount of revenue generated, though these could certainly entice more contributions if your company already clearly has potential.

In fact, all you really need is a business idea, product or service that resonates with the crowd along with the marketing chops, or access to someone who has them, to get noticed online or in the community. The entire concept of crowdfunding is that you connect with people who are excited about your business, so they open their wallets to help fund it. For example, if you’re trying to open a sandwich shop in an area that has no restaurants, residents might back you simply because they love the idea of convenient lunch or dinner options in the area. The right levels of excitement and a little luck online can help you go viral with your crowdfunding campaign, putting your idea in front of potentially millions of micro-investors and consumers.

Crowdfunding can also help you access funding quickly. Depending on how you crowdfund and which platform you use, you can gain access to funds within days or weeks. This isn’t true of every program, so you must read the fine print before you commit to any crowdfunding campaign.

Read: SBA Loan Rates

What Are the Disadvantages of Crowdfunding Your Startup?

One of the biggest disadvantages of crowdfunding is what makes it so popular with the investors: You have to offer something of value in return, and then, you must follow through on those promises. This isn’t really a disadvantage compared to other business loan options. You’re always going to have to pay something back in some way. But with crowdfunding, you can become locked into the agreement you’ll need to uphold.

If you fund your startup with a loan or business credit card, you simply have to make monetary payments according to your agreement. How you manage your cash flow to make those payments is up to you. In crowdfunding, you may agree to provide specific products or services to investors by specific dates, which leaves you less wiggle room if things don’t go as planned.

Going through a crowdfunding platform like Kickstarter or Indiegogo may make it possible to get seen by the masses, but you’ll also likely pay for the exposure. Many of these platforms have fee structures, so always read the fine print so you understand what portion of your funding may go toward those expenses.

The Bottom Line

Crowdfunding can be an exciting, lucrative way to fund your startup or new product idea, but these opportunities often come with a lot of fine print. Take your time, understand all the requirements and ensure you can back up your promises with realities before you plunge into the crowdfunding pool.

If crowdfunding doesn’t make sense for your business, don’t get distraught. Even if you can’t get a traditional SBA loan or term business loan from a bank, there are many alternative ways to fund your startup besides crowdfunding, such as using personal and business credit cards to fund your startup.

More From Seek

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Photo credit: aradaphotography/Shutterstock.com

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A new way of raising money

Online crowdfunding brings together people who want to invest in your business. Instead of you having to seek out potential investors, they come to you online. But when you raise money this way, what exactly do you 'sell'? And what do you get in exchange?

In this guide we'll look at the pros and cons of crowdfunding from your point of view. Then you can decide whether it's right for your business.

How does crowdfunding work?

Crowdfunding your business idea is a way of raising money from lots of people at once. People get funding for anything from space missions to paying for someone's dinner. But in this guide we'll concentrate on how it can help fund your business.

Crowdfunding lets many people pledge money to support a company or project. Often a total budget might be out of reach for an individual investor. But this is where lots of smaller investors can join together to reach the goal.

How To Crowdfund A New Business License

Crowdfunding websites let investors and companies meet and interact. In exchange for funding, companies offer something in return. And if the investors are interested, they'll pledge cash in support.

This is a big industry, with 16 billion dollars of funding supplied in 2014. It can be an effective way of raising money, but it's not ideal for every business.

Three types of crowdfunding

There are many different crowdfunding sites covering a wide variety of interests and industries. But they can be grouped into three main types:

1. Reward based
   

   Investors are offered a reward in exchange for funding. If the project is new software, investors might get a free copy of it. Or they could get something like limited edition merchandise.

2. Equity based
   

   Investors receive unlisted company shares in exchange for their pledged money. This is becoming more popular due to investment restrictions in some countries changing. The JOBS Act has made this easier in the US.

3. Credit based
   

   Groups of individual lenders are put in touch with companies that want to borrow money. This is like to peer-to-peer lending, but for businesses instead of individuals. Credit terms and interest rates vary, but are often more attractive than bank rates.

The pros and cons of crowdfunding

The basic idea of crowd financing is obviously appealing – and popular. The advantages include:

• High project visibility
  You don't have to work as hard to find people who might be interested in your idea. Crowdfunding gets you instant publicity – and the attention of thousands of potential investors.
• Investor engagement
  People can ask you questions and engage with you on crowd financing websites. It's a good way to build up a community before you even begin working on your project.
• The barrier to entry is low
  If you search crowdfunding websites, there are all sorts of weird and wonderful projects. When there’s no bank manager to convince, finding investors is no longer a problem.
• Critical feedback
  Not sure whether your project can succeed? Crowdfunding your business idea is a quick way to find out. If your project gains a lot of interest, it has a good chance of success.

But think carefully about the potential downsides before you try crowdfunding. Some of the disadvantages include:

• Intellectual property risk
  By publishing your idea on a public forum, you could lose control over your intellectual property. Make sure you file any necessary patents, trademarks and copyright paperwork before you start. Otherwise someone could steal your idea.
• Loss of brand value
  Your brand and reputation are priceless and should be treated as such. Choose reputable business crowdfunding sites and make sure your appeal is professional and presented well.
• The price of success
  It can be easier to raise money than to bring a new product or idea to market. Once you've crowdfunded your idea, you have an obligation to fulfill it. So be sure you can actually do that before you begin asking people for money.
• Public forum
  People can ask you questions and criticize your business plan online. If you don't manage this engagement well, it could backfire and affect your reputation. Be prepared for criticizm, and know how to handle it effectively.

Why do investors get involved?

The key to successful crowd financing is to understand what the investors are thinking. If you know what people want, you can make sure your project appeals to them. Here are some possibilities:

• Your idea has financial value to them
  Consider a company that's been searching for a way to automate their business processes. When your crowdfunding project appears, offering to do exactly that, there's a good chance they will pledge money. You're offering them a relatively cheap way to get what they want. If enough companies want the same thing, your project will be funded.
• Your project has social merit
  Businesses are increasingly expected to be socially conscious. It’s become more common for businesses to be ethical and make the world a better place. If your project ticks those boxes, you can expect a good response.
• Your presentation is interesting and appealing
  If you have an interesting and unusual presentation, you're more likely to gain funding. It's common for crowdfunding ideas to be judged on presentation as much as content. This may not seem fair, but it's the reality of crowdfunding.
• They feel an emotional connection
  Don't underestimate the power of emotion and nostalgia. One of the most successful crowdfunding projects in the UK was Elite: Dangerous. Thousands of schoolboys played the original game in the early 80s. And they formed a big part of the crowdfunding group for the new version 30 years later.
• Their peers have invested money
  News about interesting crowdfunding appeals can spread quickly, especially on social media. Some people will invest money because their friends or family have encouraged them to.

Where do you start?

How To Crowdfund A Business

Some of the big names in crowdfunding include Kickstarter, Indiegogo and GoFundMe. But there are crowdfunding sites all over the world, so try a local web search first and consider these points:

• Location
  Consider whether it matters to you where your investors are based. If you want funding for a global market research business, then it won't matter. But if you're crowdfunding a local café, that's different. Find a crowdfunding site that best suits your business. That will help you find the right investors.
• Reach
  It doesn't cost much to set up a basic crowdfunding website. But it takes a lot of time and money to build one that's successful and has a wide reach. Do your research carefully to find the one that's right for your business idea. The wider the reach, the greater the number of potential investors.
• Regulations
  Laws on crowdfunding vary around the world so make sure you double check these. And always ask an accountant for advice before you begin.
• Costs
  Crowdfunding sites will take their cut, even if your appeal fails. Read the small print carefully and make sure you understand the fee structure. Use good accounting software to test the business figures before you go ahead.

Make crowdfunding work for you

If you've decided to crowdfund your business idea, plan it carefully. Consider hiring professionals to help you present your idea. The better your presentation, the greater your chance of success.

Talk to potential investors and use social media to promote your message. Decide whether you want to use PR and marketing agencies. Anything that raises the profile of your campaign will help your crowdfunding effort succeed.

And when it does, make the most of the opportunity you've been given. Your investors have shown that they believe you can succeed with your new idea. With their backing and your hard work, you can prove them right.