Taking Advantage Of Crowdfunding

The internet has opened all kinds of new opportunities for small businesses. One of these major changes is how business owners can raise financing. In the past, business owners were limited to getting loans from the bank or possibly raising money from one or two large investors, like venture capital funds or angel investors.

Now, small business owners can raise money from a huge pool of potential investors through the power of crowdfunding. Crowdfunding’s popularity has exploded over the past few years. In 2013, crowdfunding campaigns raised $5.1 billion and analysts expect the total in 2014 to be even higher.

How Does Crowdfunding Work?

Crowdfunding is a way to raise money through the internet by collecting money from many small investors, the “crowd.” The way it works is you set up a page with a crowdfunding company like Kickstarter or AngelList. You use your page to pitch your company’s product or idea to a large group of small, online investors.

If people like your company’s pitch, they’ll contribute money. Some sites like Kickstarter use a donation model. People just give you money if they like your idea, though you can offer rewards like free merchandise as an incentive. Other crowdfunding sites, like AngelList, are more like investment markets.

People give you money in exchange for a stake in your business, like equity or a loan. The novelty behind this approach is you can raise money through many small transactions instead of one big one. Before crowdfunding, it was way too expensive for small businesses to contact and manage small investors.

Preparing to Launch a Crowdfunding Campaign

Good preparation can be the difference between your campaign‘s success and failure. Before launching your crowdfunding campaign, you need to clearly put together your company’s business plan and goals for the future. This information will help put together your pitch for potential investors and donors. You want to clearly outline why your company is different and why the extra funding will help you get to the next level. You should also get your company’s accounting records together like your balance sheet and your cash flow statement. These are helpful for investors and are also required by the SEC if you want to raise $100,000 or more through crowdfunding.

In order to start a successful crowdfunding campaign, you’ll need to create a few different elements:

• A Video - This video is specifically meant to sell your product (or more specifically the product’s future) to investors and not necessarily someone looking to buy the physical product. In the video, talk about the features, but also mention why the product is unique and should certainly take off. It’s highly recommended to hire a video production company to assist with this stage.

• Business Plan - If you don’t have a business plan set up - even a basic one - you are bound to have issues or failure. A business plan will be necessary if you ever make a pitch in person for additional funding. Include what’s known as the “pro forma statement” or “financial forecast” as well. This section outlines your expected financial future; be realistic! Your business plan, if you use an online site like Kickstarter, will be summarized and organized a bit different. You’ll want to use graphics and lists to explain your financial future with the success of that product.

• Unique - You need to stand out among the rest. If you have a product that’s similar to the rest, but there’s one thing you have that’s unique, then make sure that the investors understand that feature. Make sure to demonstrate its uses/purposes in detail!

• Get Creative - Make sure your campaign stands out as well as your product. Get creative and match your niche. If you’re offering a professional product/service like a new accounting software, then make sure the theme matches. If it’s a kid’s toy, make sure the theme matches that as well. It may be worth consulting an artistic friend if you aren’t artistic yourself.

If you’re planning on taking on new investors through crowdfunding, you’ll need to incorporate your business so your business can sell stock to shareholders. A C Corporation is best because it lets you take on the most investors.

Tips to Making Your Campaign a Success

There’s a lot of competition in the world of crowdfunding so you need to find ways to make your pitch stick out. First, tell your friends and family about your campaign and ask if they can help contribute or spread the word. People like contributing to a successful campaign and by working with your personal network, you can start building momentum right from the start. You should also set a small goal for your first campaign. The crowdfunding platform Fundable found that smaller campaigns were more likely to succeed, with the average successful campaign raising $7,000.

If you’re looking to raise money through donations, come up with rewards that people like that also promote your company. If you sell software, you could trade trial versions for a donation and potentially turn donors into customers. If you sell clothing, give away shirts or hats with a company logo to people who make large enough donations.

You should also make yourself available to potential investors. Plan to take calls and answer e-mails from people interested in your company.  It also helps to create a social media account and send out e-mail campaigns to your target audience. All these efforts will bring more attention to your campaign and hopefully bring in more contributions.

Downsides of Crowdfunding

Crowdfunding does have a few disadvantages. You do need to pay a fee to the crowdfunding website you work with, which usually comes out of the money you raise. Some websites set a minimum contribution target. If your campaign doesn’t raise enough by its deadline, the company will cancel your campaign and you won’t receive any money.

Crowdfunding also takes out the business advice you’d get from working with a bank or angel investor. These institutions usually offer guidance along with financing that comes from their experience of working with other companies. With crowdfunding, you’re on your own to manage the proceeds.

While crowdfunding isn’t perfect, it definitely opens up more financing options for small business owners. If you need more money to expand your business, be sure to keep this revolutionary new system in mind.

David Rodeck is an associate of Harborcove Financial. He specializes in making investing, taxation, and small business planning understandable. Before writing full-time, he worked as a financial advisor and passed the Series 6 exam.

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