Crowdfunding Guide: Raising Money from the Masses
If someone had told you 10 years ago that businesses would raise more money from hundreds of small donors on the internet than from wealthy investors, you’d have laughed them out of the room.
That hasn’t quite happened yet, as it turns out – but the fact that many were actually predicting this should tell you all you need to know about the exponential growth of crowdfunding.
[clickToTweet tweet=”‘Crowdfunding is the new black.’ – Rowena Wiseman” quote=”‘Crowdfunding is the new black.’ – Rowena Wiseman”]
It’s become such a popular option for entrepreneurs trying to raise money that an entire industry has sprung up to support it, with a variety of different platforms to choose from.
But how much do you really know about crowdfunding? Maybe you’re considering it as an option for financing an upcoming project, or just want some pointers on running a successful campaign – either way, we’re here to help.
In this post, we’ll give you an overview of everything you need to know about crowdfunding:
- What is Crowdfunding?
- The 3 Main Types of Crowdfunding
- Questions to Ask Before Crowdfunding
- 6 Key Points for Launching a Successful Campaign
- The Reality of Crowdfunding
- So, Should I Crowdfund?
Traditionally, business owners and entrepreneurs trying to raise money would pitch their business plans to a single institution, wealthy individual or maybe a small group of these. Basically, all the money needed to fund the project would come from a handful of investors.
Crowdfunding turns that model on its head. Simply put, it’s the practice of raising money from a large group of people, who each contribute a relatively small amount.
The internet allowed this practice to really explode, giving entrepreneurs access to millions of potential lenders by setting up a website (or using a third-party platform) to outline their proposal – essentially replacing the process of presenting a business plan to investors. Visitors are invited to support the proposal with small donations – typically £10, £20 or £50 sums, though larger contributions are normally welcomed.
The first dedicated crowdfunding website was launched in 2001. By 2012, there were more than 700 platforms in existence. Now, there are in excess of 5,000 platforms available, covering a range of different models.
While early models tended to be more simplistic, over time the concept has evolved to offer entrepreneurs more nuanced funding options. While there are a lot of small variations of these models, crowdfunding can broadly be broken down into three main categories: debt, donation and equity.
With a debt-based model, investors lend on the understanding that they’ll be able to get their original cash investment back with additional interest paid out on top. There may also be tax advantages available to the investor.
However, as with any investment there are potential risks. The investor’s original capital will be at risk across the term of the investment, and any return will ultimately depend on the success of the project.
This is the most popular option across many of the biggest platforms. With a donation-based model, investors support a project or cause they believe in by contributing money with no expectation of profit or personal gain.
Typically, donors will receive rewards are related to whatever project it is that they’re backing – such as subscription to a newsletter, free gifts (t-shirts, branded merchandise etc.), invitations to events and acknowledgements online or in print.
Rewards are treated more as a small ‘thank you’ though, rather than a serious return on their investment – a typical donation based investor will be inspired by projects that relate to their personal values, and isn’t motivated by the prospect of a financial return.
In equity-based crowdfunding, investors contribute money to the project in exchange for shares, giving them a stake in the business. If the valuation of the company goes up, so does the value of the shares.
Investors can choose to sell their shares in the company at any point, and where the company valuation has increased, they’ll make a profit. Of course, if the value of the company decreases, then they will make a loss.
A crowdfunding campaign requires commitment, both physical and financial, so before you go racing forward, ask yourself the following:
- Do I have enough initial funding to develop the physical resources needed for a campaign?
- Will a successful campaign give me the level of finance I need to carry my business forward? And in the right time frame?
- Do I have a thought-out, appealing business plan that gives potential investors all the info they’ll need to make a decision?
- Do I have a recognisable brand (or the potential for one)? Do I have an existing following that has the potential to be leveraged?
- Is there a platform that caters to investors who are interested in my specific sector?
If you can say “yes” to all (or at least most) of these, then there’s a good chance that crowdfunding is a viable option for your business.
1. Get people on board early
Think of it this way: if you were CEO of a major company that was about to go public, you wouldn’t leave it until launch day to tell potential buyers of about your stock offering.
It might be on a smaller scale but the same applies to your campaign – you need to make as many people as possible aware of your project well in advance of launch and if possible, have them primed to put their cash in from day one.
Enlist friends and family to share months before you launch. Promote blog posts and offer yourself up for media interviews whenever possible. In other words, you need to create a viable marketing plan.
Whatever approach you take to spreading the word pre-launch, make sure to build an email-list of potential investors – having a group of people interested in your project will be invaluable when it comes to launch day, and beyond.
2. Choose the best platform for your needs
This is going to seem glaringly obvious but we’ll say it anyway: put some serious thought into which business model is right for you before choosing a platform, because one will depend on the other.
If you’re going with an equity-based model, then your investors become shareholders and benefit from any profits you generate, and from any sale of the business. This is clearly entirely different to donation based funding where your obligations to your investors are limited at best.
Beyond that though, you also need to think about the user demographic of any platforms you research – does this match up with the kind of people you want to target? Some platforms specialise in servicing specific industries, so put together a shortlist of sites that serve your desired audience.
If you’re confused by the abundance of options, Inc. magazine have put together a very handy decision map for choosing the right crowdfunding platform that we’d highly recommend using if you’re just starting out.
3. Give it a unique angle
Obviously, your campaign will be helped massively if it revolves around a product, service or concept that is genuinely revolutionary or unique, but if that’s not the case then at the very least you can put a distinctive spin on it.
Have a browse of some of the most popular projects on any major platform and you’ll see they tend to range between completely innovative to outright ridiculous.
[Your business plan is probably slightly more ambitious than than the “entrepreneur” who sought funding for an $8 chicken burrito, but the success and media attention of that outlandish campaign should serve as a lesson in what a little bit of creativity can do for a project.]
4. Build trust in you and your brand
We spoke recently about how crucial strong branding is to the success of new businesses, and it’s no different for starting a crowdfunding campaign. Investors will be far more willing to back you if they believe in you, like your proposition and have trust in your campaign.
When promoting yourself, start with the absolute basics: who are you, what experience do you have, what’s the nature of your proposal, how much money are you asking for and how will this be spent?
From the very start of your campaign you need to engage with your investors, both actual and prospective. Be as transparent as possible – not just during the funding process, but every step of the way from campaign launch to the conclusion of the project or sale of the business. It’s important to remember that as the person kicking the whole process off, you’ll become the “face” of the project, so you need to be prepared to make yourself available to your investors.
The power of social proof can play a big part here too: if you can build some early momentum and visitors can see that a good number of people have already lent their support then they’ll be much more inclined to do the same themselves.
5. Learn to video market
It’s common sense; one of the most important components of any campaign is the video. Potential investors are more likely to watch a video clip than read through screeds of information, and even more likely still to share it.
Kickstarter campaigns that include video do better in attracting funding too: 50% of those with videos achieve their targets, against 30% of those without.
This amazing infographic from HighQ further underlines the massive importance of strong video content for marketers in 2017 – and for crowdfunders it’s no different.
6. Reward your investors properly
Don’t fall into the trap of complacency – you can’t forget about your investors once you reach your target, and never renege on the rewards you promised pre-launch.
Sometimes it’s as simple as a “thank you”, but a personalised, well considered bonus will always go a lot further.
It’s worth remembering that rewards are normally only redeemed if the campaign is successful. This means you’re not expected to deliver on your promises if you fall short, but you’ll want to factor in the projected cost in the event that you do manage to hit your target.
And always keep your investors informed. Make sure you show your appreciation throughout the campaign, and with any luck they’ll return the favor by helping spread the word.
When weighing up crowdfunding as a source of alternative finance, it pays to keep in mind that there’s no guarantee of success.
Take a look at some of the recent stats published by Kickstarter for an example of the success rate of fresh campaigns:
- Since its launch, on in 2009, 12 million people have backed a Kickstarter project,
- $2.9 billion US has been pledged
- 119,343 projects have been successfully funded
- 78% of projects raised more than 20% of their goal
- 20% of the total number of projects submitted in 2016 were rejected
- 41% of the remaining 80% were funded
- 14% of the projects finished never received a single pledge
- The majority of funded campaigns raise less than $10,000 US
- Of the 72,000 + projects funded on Kickstarter since its inception, about 1,600 raised more than $100,000 US
Note that Kickstarter’s target client base is not multinational companies and major corporations: it’s smaller, niche projects.
It makes sense that more personal, arts-based campaigns would be more vulnerable to failure, and this undoubtedly has a big impact on these figures.
Obviously, crowdfunding isn’t just about choosing a platform, making a video, launching a campaign and watching the money flow in. If you don’t engage with your audience or promote it properly, then the chances are your campaign will crash and burn.
If you’re starting a new business, you should also consider the time needed to conduct a successful campaign. Do you have the resource to do it properly? Ultimately, it’s a matter of figuring out the financial vehicle that works best for you and your business model.
We’d love to hear about your own experiences of crowdfunding. Have any stories to share from successful (or failed) campaigns? Let us know in the comments below.
Share The Beginner’s Guide to Crowdfunding: