According to the business finance website Fundera, $17.2 billion is generated yearly in North America through crowdfunding, and that amount is expected to grow to $300 billion by 2030. The average total raised by successful campaigns (meaning they met their goal amount) was $28,656.
Crowdfunding appeals to start-ups and small businesses because it’s a relatively inexpensive way to infuse money into a business venture while also promoting it online to a broad audience of potential customers. However, it is not without its risks and drawbacks.
Types of crowdfunding
For small businesses, there are two major types of crowdfunding: rewards-based (sites like Kickstarter, Indiegogo, Patreon) and equity-based (Republic, CircleUp, Crowdfunder).
Rewards-based funding operates by offering backers (also called “donors”) a tiered system of rewards based on the amount donated. Rewards can be a physical (possibly limited-edition) product or an opportunity to weigh in on a future product’s name or design. This type of crowdfunding is most often used by small businesses to launch their idea without entering into shareholder contracts or taking out a business loan, which comes with interest and must be repaid. Rewards-based funding best supports small-dollar contribution options.
Equity-based funding involves investors receiving shares in the company based on the amount of their contribution. These investors believe the business will be successful and expect it to generate a return on their investment. This type of funding is best suited for businesses with solid growth plans. Involving investors can result in potential hiccups if strict financial guidelines aren’t followed and can result in increased scrutiny from regulators.
The website Fundable is specifically for small businesses and allows you to choose between equity- and rewards-based funding.
How to crowdfund
First, research each platform and decide which type of crowdfunding best fits your business needs and goals. Carefully review the website’s fee structure and terms to ensure you keep more of the money you raise.
Second, create a profile for your business. Include your business plan for investors/donors to read as well as an honest and moving description of your business. Set a funding goal and your rewards for each level of donation if you’re using a rewards-based platform.
Third, publish your business’s profile online through the crowdfunding platform and pour as much energy and time as you can spare into promoting the page! Post the link on your personal social media channels to spark interest. Remember, it’s up to you to launch and help sustain the buzz and interest in your fundraising efforts.
Small business owners should know there’s a middle-ground option for using crowdfunding and the traditional financial resource of a local credit union: using crowdfunding as a steppingstone to jumpstart the business before securing a larger loan from a credit union.