There are several ways to finance a small business, one of them being crowdfunding. Since the development of websites enabling individuals to source funds from a large pool of investors, crowdfunding became increasingly popular among first-time entrepreneurs and people seeking donations for certain causes.
But this campaign isn’t necessarily the easier to way go, nor is it foolproof. It also involves risks, and not all crowdfunding websites are the same. Some are designed for limited purposes only, while others are more flexible.
Hence, let’s further explore what crowdfunding can do for your small business, how to succeed in your campaign.
How Crowdfunding Works
There are many amazing sites like GoFundMe, where you can start crowdfunding campaigns. Look for ones that don’t charge a platform fee, and wherein you can receive the funds as they come. The goal is to minimize the risks for you and your investors.
Typical crowdfunding projects are reward-based, meaning you can get your investors to participate in the launch of your new business or new product. But equity-based crowdfunding is also becoming popular, in which startups are allowed to raise money without relinquishing control to capital investors. The investors, on the other hand, are given an opportunity to earn an equity position in the business.
When you start creating your campaign, you basically just present your idea to potential investors, who can make a donation without expecting anything in return. Considering that most crowdfunding campaigns revolve around charity and personal projects, your business is likely to benefit from it most if you share its story to potential investors, such as the inspiration behind the brand, who you’d like to help through your products, and your non-profit organization partner, if you’d have any.
Potential Legal Issues
The U.S. Securities and Exchange Commission (SEC) regulates crowdfunding, and it is illegal for investors to receive a payback from their investment unless your company is SEC-approved.
If you started an equity-based campaign, investors might want to have a say in the business, so you’re required to hold annual shareholder meetings, which can be difficult, given that you’re a startup. It is also generally challenging for a startup to find venture capital funding.
Of course, there’s also the risk of not earning returns, which your investors have the right to know. If you withhold any information from them, misinterpretation could arise, potentially leading to legal disputes.
You also have to be extremely careful of your ideas, especially if it involves a patented product. File a provisional patent to be protected from intellectual property thieves.
- Do extensive research. Compare websites, look through success stories, and be sure that you’ll be following all guidelines and regulations.
- Present more than just an idea. Aside from sharing your brand’s story, don’t forget to exhibit your product, showcasing its unique qualities, its impact on the market and the industry, and how can it make life easier to everyone who will use it.
- Know your target audience. Treat your campaign like marketing. You also need to find a niche within the crowd, and create marketing materials that will appeal to them.
- Offer something in return. Even if giving rewards isn’t required, any token of appreciation will increase the chances of your success, so think of a way to give back to your investors.
- Spread the word. Share your campaign on social media, and ask people within your circle to share it, too. The wider your reach, the bigger your chances of reaching your goals will be.
Crowdfunding is a great way to obtain financing while making a meaningful connection at the same time, so if you think this strategy fits your skill and passion, go for it and thrive.