Crowdfunding 101 | The Basics
Traditionally, entrepreneurs in need of financing for their start-ups and small businesses had two options — apply for a bank loan or shop their ideas to investors. In recent years, however, the means for acquiring funding have evolved. One novel approach to raising capital is crowdfunding. Here we’ll give you a quick and dirty rundown on crowdfunding, including what it is, how it works, which websites to use, and ways to develop a successful campaign.
What Is Crowdfunding? Crowdfunding is basically the social media version of fundraising. It is open to anyone, and is an alternative to venture capitalists or traditional bank loans. It is incentive-based and involves soliciting donations via the internet by persuading individuals to invest in your business idea. How Does Crowdfunding Work? Developing a crowdfunding campaign is relatively straightforward. With a little creativity, time, and effort, you can create and execute your campaign in four easy steps: 1) Choose a website. There are over 600 crowdfunding websites worldwide, each with different policies and procedures. Therefore, due diligence is a must. Conduct your own research to determine which site best suits your goals and company values. We provide our recommendations below. 2) Establish campaign goals. This includes setting funding targets for your project, determining a timeframe for collecting pledges, and developing incentives for supporters. Your goals should be specific, realistic, and attainable. Your incentives should be desirable. This could be anything from a year of free food for a food truck campaign to supporters’ names mentioned in closing credits for a movie production firm — anything that is cool and compelling. 3) Create a campaign. Basically, you’re creating a business plan for the masses. Share your story and attract supporters. Clearly state your goals as well as the rewards offered. Be engaging, transparent, personable, and compelling. Make sure your campaign is well written and aesthetically pleasing. Include multiple photographs as well as a video pitching your idea. 4) Promote via social media. Share your campaign with followers across all social media platforms. This can include both personal and business connections – family, friends, customers, and contacts. Encourage them to share your campaign with others. Supporters can donate as much as they like and as many times as they want, until your target fundraising goal is reached or until your set timeframe expires. Which Crowdfunding Website Should I Use? With over 600 crowdfunding websites available, your options are plentiful. Below are the top three crowdfunding sites the Iowa Western SBDC recommends, based upon popularity, reputability, and user friendliness.
1) GoFundMe GoFundMe is open to businesses of all types, and requires no deadline or goal minimums. There are no penalties for missing your target, and unlike other crowdfunding sites, you keep every donation you receive. Fees include 5% of the entire amount you raise as well as a [2.9% + $0.30] processing fee for each incoming donation. 2) Kickstarter Kickstarter is open to businesses and projects that are creative in nature. The site uses an “all or nothing” model — that is, if you do not reach your funding goal by the time the campaign ends, you receive nothing and your supporters don’t pay anything. Fees include 5% of the entire amount raised as well as processing fees ranging from 3-5% per transaction. 3) Indiegogo Indiegogo is open to all types of businesses and offers two fundraising options — the “all or nothing” model or the “flexible funding” model. If you choose “all or nothing” and your campaign fails to reach its goal, you receive nothing. If you utilize the “flexible funding” model, you receive your money even if you don’t reach your target. Indiegogo’s overall fee is 9% with a 3% processing fee for each donation received. If you reach your target goal, 5% of your fees are refunded back to you.
How Can I Execute a Sucessful Crowdfunding Campaign? In order for your crowdfunding campaign to prove successful, you must:
1) Be realistic. Develop feasible, attainable goals for your campaign. This will help keep you on track as the organizer and will also build credibility with potential supporters. People will not invest in an idea that is unfeasible, so realistic goals and targets are a must. 2) Be engaging. If you don’t have an engaging story to tell, your crowdfunding campaign will flop. Develop an interesting, engaging, well-written pitch for your campaign, and accompany it with aesthetically-pleasing photos and video. Keep your campaign message short, concise, and to the point. 3) Promote yourself. Marketing yourself and your campaign via social media is essential. Develop a presence on social media platforms, stay active on each one, and dedicate yourself to spreading the word and reaching your followers. Executing a successful crowdfunding campaign requires time, commitment, and a loyal following to help get the ball rolling. 4) Incentivize, incentivize, incentivize! Offer good incentives to persuade people to donate — plain and simple. Make sure the rewards are cool, relevant, and compelling. Offer different tiers of rewards so you don’t cancel out any would-be supporters. Everything helps, and it all adds up!
If you are interested in developing a crowdfunding campaign for your start-up or small business, the Iowa Western SBDC can help guide you through process. Share your comments below, or give us a call at (712) 325-3376.
The Iowa Western Small Business Development Center is a free resource for small businesses and start-ups in Southwest Iowa. We serve seven counties — including Cass, Fremont, Harrison, Mills, Page, Pottawattamie, and Shelby — and provide free counseling services to help businesses start, grow, and prosper.
(Photo credit: 401kcalculator.org)
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