Crowdfunding is a way of financing your business through donations of money from the public. This is commonly done through crowdfunding websites.
Generally, you post your business idea as a 'campaign idea' onto the website, with a description of your project. If people want to support your campaign, they can donate money to help you achieve your goal. These supporters are often called backers. On some websites, you need to set a monetary goal, and a time frame to reach this goal by.
To encourage people to support your campaign, you can offer incentives and rewards based on amount they donate. These incentives and rewards can be anything, such as merchandise, acknowledgement, discounts on future purchase of the product you are developing, etc.
For example, you can set that for every donation of $10, you will provide an acknowledgement to the donor on your product’s website, and for every donation of $20, you will reward a 5% discount on the purchase of your product once it is produced.
Advantages of crowdfunding
The advantages of crowdfunding over other sources of funding can include:
a customer base who are already committed to your product
the opportunity for you to interact directly with your customers, who are also your investors
the opportunity to get feedback from your customers while your product is being developed and tested
free word-of-mouth marketing for your product through your backers
instead of providing a share to investors, you still own your business in full
lower commitment and risk (if you don't reach your goal, you don't have to commit).
Disadvantages of crowdfunding
As with all financing options, crowdfunding also has disadvantages. These can include:
no guarantee that you will reach your funding goal in the set time
the need to campaign and present your product well to encourage people to fund it
the need to spend time interacting with your backers and providing them with updates on your product and business development
providing incentives and rewards to your backers to encourage donations the need to deliver the product that has been promised to your backers
having to compete with other businesses seeking crowdfunding for their ideas and products.
How do I start crowdfunding?
Here are some steps to follow if you would like to try crowdfunding for your business idea or product.
Planning is an important part of crowdfunding. Since you are trying to show people why they should support your product, you need to clearly show them:
what the product is
why they should fund your product
the timeframe for developing your product if your funding goals are reached
the incentives and rewards you will give them for funding your product.
Set your goals
You need to set goals so your backers will know what to expect. These goals include:
how much funding you need
the timeframe for your funding
how long it will take to develop your business or product.
It is important to manage expectations, so your backers can track your progress. Some crowdfunding websites will not let you post your campaign unless you have a set funding goal and timeframe.
Choose where you would like to post your crowdfunding campaign
There are a number of crowdfunding websites that let you post your business proposal to attract backers. The websites differ in:
the type of business ideas they will accept
the people they reach
their requirements (e.g. some will require you to raise funds within a set timeframe)
their fees (some may have upfront fees, others only charge if you successfully raise the funds you set as your goal)
how they can help to promote your idea.
You will need to do some research to find one that best suits your business needs.
Post your campaign
To attract backers, you should try to make your campaign stand out! This can be achieved by presenting your business idea in a unique way. If you need inspiration, look at successfully funded campaigns to see what you can learn from them.
Interact with your audience
You can expand the reach and relevance of your campaign by interacting with your audience on channels such as social media. Keeping your backers informed about your progress will also increase the chances of them marketing your product to other people.
Thank your backers
Once you have raised the funds you need, you should thank your backers and give them the incentives and rewards you promised them. It's also a good idea to keep them in the loop throughout the implementation of your business idea, so you can keep them interested in your product.
What happens if I don't reach my goal?
The terms and conditions of your crowdfunding campaign will vary depending on where you choose to post your campaign. Some websites will not allow you to access any funds you raise unless you reach your funding goal, while others will let you keep the funds you raised even if you don't manage to reach your funding goal.
Read the terms and conditions of the crowdfunding site you choose to post your project on carefully to find out what your options are.
What if I can't implement my business idea after I raise funds?
You are responsible for implementing your business idea once the funds are raised. If you find that you can't implement your business idea, you will need to figure out what to do with the funds you have raised, which can include:
offering refunds to your backers
letting your backers know exactly how the funds have been used if you are unable to refund them
offering other incentives or rewards to your backers.
You are also responsible for giving your backers any rewards or incentives you promised to them. If you are unable to meet those incentives, you need to refund their donation amount. Otherwise, they may be able to take legal action against you.
Legal issues for crowdfunding
You may need to register for certain licenses or meet certain legal terms and conditions depending on the type of business idea you are raising funds for, and also the type of rewards or incentives you intend to give your backers. This is especially in cases where your business idea, or reward to your backers, is a financial product.