How businesses can really take advantage of crowdfunding

It’s no secret that crowdfunding is still exploding in popularity. From businesses raising millions to the internet getting together to help devastated communities in their time of need. How can you get a slice of the pie?

It’s no secret that crowdfunding is still exploding in popularity. From businesses raising millions to the internet getting together to help devastated communities in their time of need.

But how can you get a slice of the pie? How can crowdfunding help your business raise the funds it needs?

First, lets go through the three different types of crowdfunding – donation, reward and investment crowdfunding.

Each method suits a different type of business and based on your situation, you can decide which one is right for you.

Donation-based crowdfunding 

This is where your crowd simply donates to you and expects nothing in return. They donate because they believe in you and want to see you or your business succeed.

Donors are most likely to be the people in your direct networks and although you could get local press, national press is unlikely.

With donation-based crowdfunding for businesses, you’re unlikely to raise more than $25,000 (£16,500).

The advantage of donation crowdfunding is that it’s fast, easy, and minimal effort once the campaign ends.

This is best suited to a small business with a loyal following similar to crowdfunding site GoGetFunding.

gofunding

Reward-based crowdfunding 

This involves offering backers a reward for their donation. Here’s a list of the most common and successful rewards:

  • Personal thank you letter / thanks on the corporate website.
  • Discounted product / service.
  • Early version of the product / service.
  • Novelty items such as hats, t-shirts, mugs.
  • Chance to meet the campaign owners.
  • Entry into an exclusive event.
  • Involvement in a particular project.

Campaigns that do exceptionally well are those that offer an innovative product at a discounted price or exclusively throughout the crowdfunding site.

For example, the Pebble iPhone watch which raised more than $20 million.

Pebble crowdfunding

Although it’s important to remember that the majority of successful campaigns fall within the $1,000 to $20,000 range. But many campaigns still do raise between $20,000 and $100,000.

With reward-based crowdfunding, you must ensure that you calculate the full cost of the rewards. Specify reward limits where applicable, factor in shipping costs and have a well though-out fulfilment plan.

You should offer rewards at all price levels. From $20 to $2,000+. The lower reward levels are for those who just want to get involved in the campaign whereas the higher reward levels are good press talking points, even if the rewards aren’t claimed.

You should also hold back a reward or two, introducing them halfway through the campaign to re-ignite interest and boost buzz.

A successful rewards campaign is a great precursor for equity crowdfunding. First, because it provides proof that consumers believe in the business.

Second, the dollar amount raised via reward crowdfunding is typically lower than equity crowdfunding.

Finally, although a rewards based campaign can deliver short-term publicity, happy investors are lifetime brand ambassadors.

Investment crowdfunding 

Equity and debt crowdfunding is now legal in most developed countries around the world and depending on where you’re based, you can raise millions with it if you have a business that people believe in.

Equity crowdfunding involves having investors buy shares in your company. After a few years, investors can potentially profit depending on your exit strategy.

Some companies plan to be publicly listed on the stock market whereas others anticipate a private equity buy-out or acquisition.

Equity crowdfunding is the recommended route if your business has already raised a large amount of debt as you won’t burdened with further interest payments. On the downside, you’ll be giving up ownership of your company, which is sometimes a concern of early stage businesses when their value may not be so high.

Debt crowdfunding, suited to more mature companies with predictable revenues, is where businesses will pay interest on top of capital repayments. As debt instruments are usually secured against the company assets, the associated return is typically lower than in a successful equity crowdfunding investment.

Debt crowdfunding is recommended when the money is raised for a specific purpose over a well-defined period of time. Debt is best for companies that have both assets to borrow against and the cash flow to service the loans.

There are also variations of the above. For example, non-asset backed debt, convertible debt and more. It’s best to seek personalised professional advice relevant to your business if you’re seeking investment crowdfunding.

With investment crowdfunding investors tend to back businesses that they genuinely like rather just on the attractiveness of their balance sheet.

As a result, you should also include rewards to compliment your financial terms. The same types of rewards as discussed in the reward section apply here.

Whether you choose you use donation, reward of investment crowdfunding, the same principles apply for you to raise the money you need.

That includes:

  • Extensive planning at every stage of your campaign. For example, plan which team members are responsible for what, create a social media calendar, shortlist journalists that you’ll reach out to and more.
  • Ensuring you offer something that your existing networks want. For example, with donation crowdfunding the donor’s desire is to connect with and help a person they care about. With reward crowdfunding, it’s to get an exclusive or exciting perk. And with equity crowdfunding, it’s primarily to seek a great return on their investment.
  • Setting a realistic goal. Carefully consider exactly how much is needed to complete what it is you need to do. If the initial target seems too large, consider splitting that up into smaller campaigns. For example, if you’re making a movie, before crowdfunding a feature length film, crowdfund a short movie to begin with.It’s always good to be prudent and exceed your goal as opposed to setting an ambitious target that you never meet. This is particularly important when you consider that some crowdfunding sites employ an all-or-nothing funding model – so if you don’t reach your goal, funds are returned to backers.Crowdfunding.io predicts the amount you’ll likely raise based on your existing following and can help you set a realistic goal.

crowdunding io

  • Creating a great campaign page. Be sure to include a campaign video and thoroughly explain who is raising money, what exactly it is being used for and why you’ve chosen this route. Create a personal connection with your audience and help them truly understand your business so that they believe in you and your team.
  • Structured outreach. Don’t blast your campaign link on all social networks as soon as your page goes live. Instead, get your closest friends, family and followers to back you first. Once you have some momentum and social proof, expand your reach to all social networks, journalists, bloggers and beyond.
  • Foster relationships with everyone that supports your campaign in any way. If looked after, these people will be your brand ambassadors for years to come.

Remember that crowdfunding isn’t simply a chance to request money. Crowdfunding is shared enthusiasm and providing your crowd with the opportunity to get involved in something they believe in.

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