Crowdfunding: The Basics for a Small Business

Crowdfunding is a method of raising capital for a project or venture by collecting small amounts of money from a large number of people. Typically, crowdfunding is done via the Internet on dedicated online platforms. Only in the US, there are hundreds of online platforms with crowdfunding services such as Kickstarter, Indiegogo, GoFundMe. They connect entrepreneurs and their business ideas with thousands of people around the world who are willing to make small donations in return for some type of reward. 

How Crowdfunding Works

Crowdfunding is an alternative way of financing a project that has gained popularity in recent years, as more and more people are willing to connect online and invest in a product that matches their needs and values.

Let’s take a look at the example:

A person or company that wants to make their idea happen presents it on a crowdfunding platform. For instance, someone may want to raise $10,000 to fund the production of their new type of sunglasses. This means they would need 100 people who are willing to pledge $100 each for the project to proceed (or 1,000 people with $10 donations, or 10,000 people with $1 donations, etc). Those people who pledged money will later receive something valuable in return. 

One of the most significant specifics of crowdfunding is that businesses can only get investments if the project reaches the amount of money set as the campaign’s goal.

So, clearly, a crowdfunding project should offer a specific incentive to make people want to invest any amount of money in your idea. 

Crowdfunding Rewards

Here are the incentives that a business can promise to those who supported their crowdfunding project:

1. MONETARY REWARD

• People get equities

The business owner must produce and market the product announced in the crowdfunding campaign and offer securities for return on investment.

2. NON-MONETARY REWARD

• Pre-orders for a product before it hits the market

People expect to get the product they fund earlier than anyone else.

• Unique offers/Limited collection

The company delivers to its donators a unique product or a pack of service that won’t be available to anyone else.

• Innovation/Market disruption

People are willing to see some innovation that wasn’t present on the market before.

• A good cause

People just want to support some good cause they believe in. 

Keys to a Successful Crowdfunding Campaign

Starting on the right foot is the key to a campaign’s success. This is why every good crowdfunding project begins with good preparation. 

A crowdfunding campaign consist of these major parts you need to take care of:

1. Goal: how much money you need and why.
2. Incentives: what people will get for their donation.
3. Timeline: the deadline for raising the required amount.

Make sure to provide:

• A good idea pitch and a polished business presentation.
• Engaging and personal content for PR and marketing promotion techniques.
• Plenty of video and image material to keep people engaged and update supporters on the progress. 

Be ready to clarify for your followers the following points:

• What is unique about your business idea?
• How much money do you want to raise?
• What will this money go for?
• How long is the project open for investment?
• What will sponsors receive in return for their investment?
• How and when will sponsors receive their rewards?

In this series, we explore some of the most common types of financing that businesses use. Take a look at the next chapter to find out more.

👉 Learn more about business financing 👈