Financing a small business has become easier with the rising popularity of crowdfunding. Almost every day we hear stories about crowdfunding where people raise thousands or millions of dollars of funds online for their businesses. There has been a lot of chatter out there about online business funding and hundreds of crowdfunding sites are popping up nowadays. However, not all have real communities, investors and success stories under their belt.
Therefore the question arises: Which crowdfunding site would best suit your purpose?
Let’s begin with an overview of the industry.
The Crowdfunding Industry
A study commissioned by the World Bank in 2013 predicts that by 2025 crowdfund investing will be equivalent to a $93 billion market. This defines the global potential of online business funding. Crowdfunding or online funding for business through collaboration is experiencing an exponential growth in global economy.
According to a Massolution report, $2.7 billion (81% growth) were raised in 2012 through crowdfunding across over 1 million global campaigns. The same report stated that approximately $5.1 billion business funding occurred globally in 2013, which is almost a 100% increase from the previous year.
Passed in April 2012, the JOBS Act made it easier to fund small businesses in the U.S. and also encouraged investment crowdfunding. The most interesting areas of development in crowdfunding include investment crowdfunding, where investors become shareholders; localization, where the business funding is focused on participants from specific neighborhoods or cities; and group-based approaches and mobile solutions.
Different Models of Crowdfunding
When it comes to crowdfunding, there are basically 2 main models:
- Donation-based funding: This model gave birth to the concept of crowdfunding. Funders make collaborative donations through goal-based processes in exchange of perks, rewards or products.
- Investment crowdfunding: In this model, businesses seeking capital sell ownership stakes as equity or debt. Funders become shareholders in this model and unlike the donation model, they enjoy a potential for financial return.
How It Works
The rules of crowdfunding differ from site to site. However, the general idea is that a business/individual needs to pitch an idea and set a goal for the fundraising along with a deadline. Potential funders review the pitch and they invest/donate if they like the idea.
People on crowdfunding sites do not invest in a business or project. Instead, they fund the project and are rewarded in return if the business/project comes to fruition. These funders do not necessarily own any part of the project. However, different sites follow different rules. Therefore, it is recommended to review the terms and conditions of the crowdfunding sites carefully, especially those based outside the U.S.
The following is a generic example to launch your own project in a crowdfunding site.
- Start with a pitch – describe your project with a funding goal and a deadline and specify the rewards your funders will receive upon the success of the project.
- For most crowdfunding sites, no money changes hands if you fail to reach the funding goal by the end of your timeline.
- Though pledges are made via credit cards, a funder’s card won’t be charged unless the project is funded successfully.
- Get your projects noticed to catch the attention of the funders. Use the power of social media to engage your community and gather enough patrons for your business funding. Be engaging and personable.
- Get some of your family or friends on board to get the initial boost of cash. This will help you in the future to get the ball rolling as people are less likely to be interested in your idea if your funding is stuck at zero.
- Once you reach the funding goal within the defined timeline, close the deal and give away the specific rewards that you promised earlier.
Support for start-ups and small businesses has never been stronger. But the availability of so many funding options often creates confusion for an entrepreneur starting out to determine which options are most lucrative. Here are some tips to help you identify the best crowdfunding deals for your business idea.
Know Your Target Audience
It’s quite similar to pitching your business for sales. You need to identify the target audience. If you already have online fans and followers they can be your potential audience to target. Also, focus on a passionate niche. Study the successful crowdfunding projects to identify your specific, narrow audience. There are many factors that drive the interests of the funders apart from the project idea itself. These can be a geographic area, a common background, or a common religious/cultural belief. Identify that niche and aim your pitch at them.
Select the Right Crowdfunding Site
There are many crowdfunding sites available and each is designed for a specific audience. Based on your business idea and target audience, choose the right site to pitch your purpose.
Plan in Advance
When you are trying to raise funds online your approach should be similar to the way you will treat your business and planning ahead is indeed a part of it. Online business funding can often go by really fast. In fact, most of the funds come at the very beginning of the project and towards the end of it. Therefore, have your emails written exclusively for all three phases of your project, i.e. the beginning, the middle and the end of it. The idea is to keep the fundraising project active all through its life cycle.
A better approach is to prepare FAQ-type emails so that you can respond to every interested funder, especially when your project takes off.
Leverage Your Social Network
You need to realize that not all your target audience is familiar with crowdfunding. Here comes the necessity of using social media. Your social networks along with other communication tools like email marketing help to attract the attention of your community and drive them to fund your project at a crowdfunding site.
When it comes to raising business funds online you really need to be passionate about your project. Remember that you are pitching your idea on a crowdfunding site where there are several other projects trying simultaneously to attract the attention of the funders. Therefore you need to stand out in the crowd; create a compelling name and description for your project and add a striking image. If possible, add a video too.It takes a combination of passion, strategic planning and a clear vision for a successful crowdfunding campaign.
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