Crowdfunding – Alternative Ways to Raise Business Capital
Crowdfunding is becoming an increasingly popular way of raising business capital in an alternative way. Its popularity is growing partly because there’s typically little to no risk involved in developing and implementing a campaign, and you aren’t tied to sometimes business-crushing interest rates associated with traditional loans or investments.
There are several factors you need to consider before going ahead with a crowdfunding campaign, however, and I’ve put together this useful, easy checklist for you to get started.
Determine Your Why
Before starting a crowdfunding campaign, determine why you need the money and if crowdfunding seems like a viable option for it. Some examples of why different businesses have chosen crowdfunding include:
a. New Business Idea
b. Business Expansion
c. New Product Idea/Testing/Concept Validation
2. Determine Which Platform You Will Use
There are tons of options out there when you’re looking for a platform to start a crowdfunding campaign (eg. Kickstarter, Indiegogo, Alberta-Only ATB BoostR). You’ll want to conduct your research and review each of the following:
a. Fees and Fee Structure
b. Timeline for payouts
c. Document requirements (eg. Business licences, Tax ID #s, etc)
d. Available Support – Do they offer one on one assistance? What technical support is available?
3. What Type Of Campaign Will You Run
Nowadays there are more and more options and crowdfunding models. Determining which one is best for your business will depend on what you need the money for and what you’re offering your backers. The most popular types of campaigns available are:
a. Reward-based – This type of campaign is where you offer products, experiences, or services based on different levels of investment. The backer chooses a reward for a certain amount, and you deliver it at the close of the campaign.
For a rewards-based crowdfunding campaign you can either choose an all-or-nothing goal, where there is no real risk to either business or backers because nothing is promised unless the entire goal is met, or you can do as-raised campaign, where you have to deliver to all of your backers regardless if you reach the goal or not. The latter would be much riskier if you were offering your backers a chance to be the first owners of a concept or invention if you don’t reach your goal, and depending on what you promised them, you still need to deliver on your offer.
b. Equity-based – Equity-based campaigns are a little more complicated and require legal paperwork and more upfront initiative. This model is basically the easiest way of reaching investors in businesses. It’s a less traditional way of having to find and dealing one-on-one with investors who you’ll typically only end up working with one or two at the most versus opening it up to a much bigger pool. It’s the first step to “going public” in a sense.
c. Donation-based – Donation-based campaigns are typically only run for personal or private campaigns such as medical expenses, a death, etc. Most platforms don’t allow for businesses to run donation-based campaigns.
4. Things to Plan For
There are several items that many businesses don’t plan for or consider before they begin down the crowdfunding campaign road. Here are four things to watch for that I’ve seen inhibit success for some campaigns:
a. Time – I’ve seen it happen where a business thinks this will be an easy solution to all of their problems, but what they forget is that they are already strapped for time and running a successful campaign, takes A LOT of time. The planning, execution, and follow-up take a lot of additional hours, even when you’re working with a professional campaigner, you’ll still be required to devote a lot of time to networking, media relations, customer relations, and administrative tasks.
Additionally, some people think that you can just write up a plan and get started but there are so many factors up front to consider. For instance, if you’re a new business and don’t already have a huge customer base or following, you’ll need to build in time to generate the and active audience BEFORE you launch your campaign. Don’t wait until the campaign has launched because you’ll waste the very limited time you have just trying to get their attention about your business, nevermind the campaign itself.
b. Fees – When you’re determining what your goal is and building out your budget it’s incredibly important to ensure you factor in the fees associated with running the campaign. If you need $20,000 for your project, you’ll need to determine how much you’ll have to pay to the platform (typically around 5% + $2-5 per transaction) and other professionals you engage throughout the process.
c. Post-Campaign Work – This ties into number one- Time. You need to recognize that there will be several follow-up tasks you’ll have to do when the campaign closes. This will primarily be keeping your backers in the loop, sending out orders, and ongoing customer relations.
d. Money Required Up Front – People sometimes get the impression that running a crowdfunding campaign is free. They’re WRONG. Running a crowdfunding campaign is no different than running any other promotional campaign. It takes extra time and money and you need to invest, sometimes thousands of dollars, into the campaign. There’s consultant fees, marketing fees including advertising and printing, and of course time.
5. Tips For a Successful Campaign
a. Have a Plan – develop goals, timelines, messaging, correlate your campaign to run with current events (or at a different time depending on how much “noise” there will be)
b. Tell a Story – give as many details as you can and take potential backers on a journey of what you’ve been doing and where you want to go. Sell them on your vision. Provide ongoing updates, you want them to feel like they are a part of something important.
Tell the story in as many ways as possible. Use social media, media relations, product photos, high-quality video, anything that will appeal to your audience and keep their attention.
c. The 30% Rule – The most successful/viral campaigns raise at least 30% of their goal BEFORE they even launch. How do they do this? They leverage the connections they already have. Get them excited about the vision. This is basically a mini-campaign prior to going live.
For more information on how to get started, contact us.