October 06, 2014 Video Tips

Amy Cortese, journalist and author of Locavesting, answers the question, "What is crowdfunding?" As Cortese explains, crowdfunding is the marriage of finance and social media. It allows entrepreneurs to use the collective power of the internet to raise small sums of money from lots of different people.

Crowdfunding fills a gap in the market for all kinds of entrepreneurs, small businesses, and creative artists who aren’t able to get capital in traditional ways. It's great for people who have a compelling story to tell who can get people interested in them.

"Instead of going to a bank, you're reaching out to your social network, the people who support you, your biggest fans, and your customers," says Cortese.

If you want to create your own crowdfunding campaign, you would come up with rewards you will offer in return for monetary contributions. It could be a t-shirt, it could be the product you're making, or it could be a product discount. Or if you decide to create an equity crowdfunding campaign, then contributors would be given ownership stakes in your company.

Choosing a Crowdfunding Platform

Now that you’ve learned what crowdfunding is, it’s time to explore ways you can launch your own campaign. Start by figuring out which fundraising platform is right for you. Different platforms cater to different types of campaigns.

Kickstarter and Indiegogo are two of the most popular rewards-based platforms. While Kickstarter focuses on creative or tech ventures, Indiegogo has a broader focus and campaigners can raise funds for just about anything, from tech projects to creative undertakings to charity. Crowdrise raises funds exclusively for charities and causes.

Crowdfunder.com is a crowdfunding platform that helps business owners raise investment equity from individuals, angels, and venture capitalists.

Of course, these are only a few options, and it helps to explore what other platforms might be right for your business. While the best-known web platforms for crowdfunding are Kickstarter and Indiegogo, there are others, such as smallknot, which focuses on small, local businesses, and ioby, which funds neighborhood improvement projects.

Depending on what your small business is trying to accomplish, you might discover a crowdfunding platform that caters to your specific goals as you explore your options and pick the platform that best fits your project.

Learn the Fees and Terms of Crowdfunding Platforms

Before you settle on which platform you’re going to use, you need to compare their cost and other relevant terms. Do they allow you to keep the money raised even if your goal isn’t met? What type of campaign will the platform accept? Explore your options to see what will be best for your business.

Kickstarter, is an “all-or-nothing” model, which means you lose all of the funds you raised if you don’t meet your goal. A Kickstarter campaign will cost you 5% of funds raised, plus 3-5% transaction fees.

Indiegogo has two different plans: the all-or-nothing plan, and the flexible funding plan. If you go with all-or-nothing, then indiegogo only takes 4% of the funds if you’re successful. If you go with the flexible plan and you fail to reach your funding goal, then Indiegogo takes 9% of the funds you raised. Transaction fees are an additional 3%.

It’s a good idea to double check and research all the terms and fees associated with your chosen crowdfunding platform so that you’re not upset by any obscure costs or other surprises involved with hosting a campaign.

How to Plan Your Crowdfunding Campaign

Crowdfunding is a great method to use to raise funds for your small business, and there are now over 190 different platforms available, only a few of which we’ve discussed above (i.e. Kickstarter or Indiegogo). Erica Dorn offers a few tips on how to start a successful crowdfunding campaign:

If you’re going to do it, do it right. Activate your network and spread the word on social media to get your supporters and clients excited about your campaign.

According to Entrepreneur.com, the average successful crowdfunding campaign:

  • lasts 35 days
  • offers nine levels of rewards
  • has an average pledge of $87
  • has eight updates from the campaign owners
  • the founder of the campaign has an average of 923 friends
  • the average campaign video lasts three minutes and four seconds

Choose a funding goal amount that you feel comfortable with. Do your research: go to different platforms and check out your peers. What are they raising? What are the incentives and rewards they offer in order to draw in donations?

Be prepared. There might be unplanned costs in your campaign, such as packing and shipping rewards, so make sure you have a clear, comfortable budget before you begin.

Don’t limit yourself. Turning to crowdfunding doesn't close the door to other options. In other words, even if you fundraise for your business via crowdfunding, you can still take out a loan from Accion.org.

 

Crowdfunding is such a powerful tool because, not only can it help you access financing, but it can also attract more attention and publicity to your business.

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