Should You Try Crowdfunding Your Startup?

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Essentials-of-CrowdfundingUnless you are independently wealthy or have a line of investors at your door, you’re going to need capital to get your startup going. If you want to steer clear of traditional loans, crowdfunding is an option worth exploring. Crowdfunding is a way of raising money for a project through donations or investments from the public. In the case of startups, crowdfunding can be used to launch or grow a small business.

“It’s such a different experience from going to a bank and trying to get money — I definitely recommend it,” says Michelle Bruder, who used the crowdfunding website Kickstarter to launch her small ketchup company, Revolution Sauce. “It takes a lot of time, you have to put some money into it and it’s a lot of work, but it’s a lot of fun.”
In one month, Bruder surpassed her crowdfunding goal of $3,600. She used the money for insurance, licensing and other fees, and found the campaign to be a great way to connect with her target market. For most of her rewards, she gave away bottles of her ketchup. Bruder, who lives in Orlando, Florida, is starting a second business soon — a bakery — and plans to crowdfund that project as well.

Of course, there’s no guarantee you’ll get the money you need. On Kickstarter, only 37% of projects successfully reach their funding goals. So before going the crowdfunding route, you should examine your small business loan options.
With crowdfunding, unlike a traditional small business loan, you don’t have to pay back the money you’re given. Instead, you incentivize contributors with rewards or equity, depending on the type of service you use. In the end, you may find crowdfunding an attractive addition or alternative to the usual types of startup financing.

Which crowd to follow.

There are two main types of crowdfunding that could be suitable for small businesses:

  • Rewards-based crowdfunding enables a startup to raise capital in exchange for a reward of some kind for each investment. That reward could be a sample of a product your business sells or a handmade gift. Typically, you only receive the money invested if you reach or exceed your goal. Depending on the platform, you may also be charged a small percentage fee of the funds you raise. This type of crowdfunding is best for businesses trying to raise less than $100,000. Popular services for this type of crowdfunding include Kickstarter, Indiegogo and Fundable.
  • Equity-based crowdfunding is an investment model that rewards contributors with shares in the company. The number of shares a person receives is based on how much money that person contributes. A small percentage fee is charged on the total amount raised, and you may have to pay for a payment-processing service. You’ll need to provide background information on your company, including finances, where the money will go, and who is involved in the business. Popular platforms for this type of crowdfunding include AngelList, EarlyShares, CircleUp, EquityNet, Crowdfunder, and Wefunder.

Tips for a successful campaign.

Given how unreliable crowdfunding can be, you’ll want to make sure you’ve properly prepared for your campaign. Here are a few features that make many campaigns successful:

  • A clear goal for your startup. Chances are you believe in your business, but will strangers? Make sure you have a goal that other people can get behind. What sets your business apart from others? What are you doing that is important or in demand? How will you use the money you’re given? Make sure you explain your business goal in a way that will entice people to contribute.
  • A community of support. James Fayal, founder of Zest Tea, which produces a line of caffeine-enhanced energy teas, ended up raising nearly $10,000 — about $6,000 more than his original goal. His campaign was part of a contest held on the crowdfunding platform RocketHub. He credits the project’s success to a “relentless pursuit of our supporters.” He said that “once you get that initial interest and initial commitment, you need to stay on them because a lot of people will fall through the cracks.” Fayal suggests building a community of support about two to three months before launching a crowdfunding campaign. Once it starts, stay active in informing your supporters about updates to your campaign. When it’s all over, make sure to deliver in a timely manner on any rewards that you promised.
  • Great visuals. Quality photos and video are fundamental to a successful campaign. If you have a specific product as part of your business, be sure to include photos of prototypes. In your video, be creative, concise and transparent about business and marketing strategies. Offer a clear call to action.
  • A solid marketing plan. The most successful crowdfunding campaigns have some hype behind them. One of the most successful Kickstarter projects of all time — the Coolest Cooler — took two tries to receive funding. The first time, the startup fell short of its $125,000 goal, raising $102,000. After the cooler’s creator, Ryan Grepper, retooled the campaign and lowered the goal, it went on to raise more than $13.2 million in its second run. Promote your campaign on social media and reach out to the press for exposure.

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Check out NerdWallet for more information about reward and equity crowdfunding. If small business loans make more sense for you, we can help determine which ones you may qualify for.