by Joshua Botello
If you are starting a business and need some start up funding for you may feel limited in what is available for getting your business off the ground. Traditionally a prospective business owner would create a business plan like we do here at the SBDC and that client would take it to a bank, angel investor or VC to get their venture funded. Unfortunately, because this method narrows your chances to a few major players, the likelihood of getting the capital you need diminishes when pitching to those few people. Enter Crowdfunding.
What is Crowdfunding?
What exactly is Crowdfunding? Crowdfunding is a way to raise the capital for your business or project through the collective efforts of family, friends and investors. The hallmark of crowdfunding is using small amounts from "the crowd" to invest enough collectively to fund the business. This is usually done through efforts in campaigns coordinated on social media and video media.Don’t worry we’ll get to that below.
Types of CrowdFunding
So if crowdfunding looks like something you're interested then let’s get into the types of crowdfunding you can do. There are technically 3 types of crowdfunding:- Equity Crowdfunding
- Rewards Crowdfunding
- Donation Crowdfunding
Equity Crowdfunding
If you have any cursory knowledge of business terminology this might sound familiar. Equity crowdfunding takes money as an investment for the promise of future returns. After the business reaches its predetermined goals they now have a fiduciary obligation to pay some amount of return based on what each investor has contributed. This is different from normal investing for businesses because these companies need to be publicly traded on the stock market; the investor does not need to be accredited or certified; and can tailor the amount needed for relatively minimal effort.Like anything involving business or money there are rules. In 2011, SEC created some ground rules for equity crowdfunding:
- Maximum of $1,070,000 in a 12-month period
- Transactions must take place through SEC registered online intermediaries
- Requires disclosure of information in filings to SEC, Investors, and the intermediaries
Rewards
The type of crowdfunding that is most popular with the general public is rewards based crowdfunding. This type of crowdfunding allows businesses to take predefined amounts of money in exchange for specified rewards. This also allows the business to create a tiered system where a larger investment in exchange for higher value rewards for backing the project. This is used by many product manufacturers or inventors to fund the creation of products and promote early adoption.Donation
This final one is unique from the previous types by not requiring an exchange for backing. Donation based crowdfunding allows backers to give money in “exchange” feeling good about supporting a worthy cause. Many of the causes that donation based crowdfunding are used for are:- Raising money for expensive medical care for disadvantaged people
- Raising money to get individuals get on their feet after a disaster
- Raising money for college tuition for those who couldn't otherwise afford it
Platforms
Every type of crowdfunding has their major players for businesses looking to raise capital for their projects. Here’s of those players to find the right one for your project:
Fundable is a rewards and equity based crowdfunding. They primarily specialize on the equity side of crowdfunding. Fundable does have plenty of learning material regarding equity fundraising, similar to angel and VC to inform business how the process works and how terms can be formed. This isn’t an endorsement of the platform, and if you are looking for other providers take a look at these.
Kickstarter is the premier rewards based crowdfunding platform. Kickstarter has a lot different rules on what type of products and industries they will back. Here's how the process works: determine your project and the costs, determine your rewards and tiers for backers and tell your story. What you have to understand about kickstarter is that it's and "all-or-nothing" platform. This means the project needs to be backed in full to get the money and Kickstarter does charges 5% on transactions to offer the service.
GoFundMe is foremost donation based platform available online right now. GoFundMe allows backer to donate money based on user needs. The users can withdraw funds throughout the campaigns and small percentage is taken out of the total to fund the services. You can always check any other rules or important question in their FAQ.
CrowdFunding Tips
There are many best practices to launching and managing a successful campaign. These tips are universal and can be applied to most types of campaigns and platforms. So let's take a look at 5 tips you can use for crowdfunding success.Choose the right crowdfunding type and platform
First tip is to choose the right crowdfunding type and platform. As you you are planning out your campaign you need to figure out which type of platform is acceptable for your project. Equity-based platforms have for specific kinds of businesses and rewards platforms don't allow for donations. You can always check out the the resources for above to determine which platform might be best.
Define the terms
As you're planning out your campaign and you've decided your platform, you now have to pick the right terms. This could be done in terms of picking the right rewards and funding tiers that attractive for backs for platforms like kickstarter. For equity crowdfunding this is done by naming the terms deals and expected returns with Fundable. Remember, planning is going to be your biggest asset when developing a successful campaign.
Communicate
Once you are past the planning stage, you now need to how to communicate your business for your campaign. What is the kind of information you need to communicate? You need to let your potential backers know about the strength of your company or the project you are looking to fund. Using an existing business plan or marketing plan.
Create Great Marketing
Once your campaign is up and running you need to take the messages you developed in the planning to distribute. What kind of marketing materials should you make? Well, successful campaigns incorporate high quality graphics and video to give potential backers the best sense of what you are trying to achieve.
How do you get the word out? Use the channels you have. Most of the your potential backers will be current clients because they already know you and what you're business about. Social media channels, email and Youtube are all viable channels up for grabs. Just remember to meet them where they hang out.
Keep Your Promises
Whether you're a business looking for money, funding a new product, or collect donations for a worthy cause, you need to keep your promises. As a business keeping your promises is the most important trait. If you're raising money on Fundable and do well, you need to pay those investors. Just as if you are on kickstarter and get funded, you need to make your product or distribute the rewards for backing your project. The worst thing you can do as business is taking the money and run.
This comment has been removed by a blog administrator.
ReplyDelete