Crowdfunding campaigns raise funds for businesses through small individual contributions from a large group of contributors.
There are three types of crowdfunding:
- Crowdfunding with equity – Investors get shares or profits.
- Donation-Based Rewards/Crowdfunding: The money comes through donations. There is a rewards program, usually a product or service.
- Debt Crowdfunding – Early-stage companies attract investors who charge high interest rates for business loans and the amounts are small.
This system works well for real estate investing, as investors commit smaller donations or capital to any property. It’s a great way to diversify your stock portfolio. You just have to lock up the money for a few years.
This is also good for developers. It allows them to reach a wide variety of investors. These developers can take to social media for donations. Take notes. A change in the 2012 JOBS Act provides more access to the U.S. real estate market and crowdfunding.
Although you can invest smaller amounts, most sites want you to be an accredited investor.
How crowdfunding works
Successful crowdfunding campaign raises small amounts of money from a large number of people. This is different from a traditional business loan. There is a perception that working with a crowdfunding program to raise money is easy. But a successful campaign takes time and effort.
This is how crowdfunding works.
- You must create a profile regardless of the crowdfunding site you use. Product graphics and images help raise money. Most include an introduction video and some supporting content.
- There is usually a subscription fee to fund projects. A payment processing fee may cost 2.9% or .30 for each transaction. Along with transaction fees, platform fees range from 3 to 5 percent.
- Setting a fundraising goal is essential. Some crowdfunding platforms will allow you to raise money even if you miss your goals, but others will not. Therefore, small business owners need to be realistic.
Small businesses must consider their annual sales before arriving at the campaign’s gross sales numbers. Getting investment advice is helpful. It can dictate the point at which you should stop raising money to ensure success.
- It is important to gather backers before the launch of your crowdfunding projects. And it involves marketing your business venture. Successfully funded campaigns send consistent updates via email and social media.
- You can collect funds from the most successful campaigns. The crowdfunding reward shows successfully processed payments in your account. A crowdfunding equity platform allows you to work with investors to close the deal. Learn more about GoFundMe’s payment fees here.
Tips for successful crowdfunding campaigns
Crowdfunding for businesses is a great way to get a startup off the ground. Here are five tips to get you started, and remember that there are legal requirements with each of them.
It starts with a community
If you want to use a platform, building a community is a good start. Reach out to members of the media and influencers to build momentum. This tip works for all types of crowdfunding. However, you must remember that this is a numbers game. You want to be strategic about who you contact. However, at the same time, you don’t want to limit your options or limit them.
Offer good incentives
Offering hats and caps or t-shirts as incentives encourages donors to give more. Different tiers for a crowdfunding company give people a way to remember your campaigns. Media hype can influence what the average customer pays.
Keeping things simple is good. Having several additional packages and accessories may not work well.
You need good copy
Cookie-cutter slogans can affect your campaign promotions. If your peer-to-peer lending phrases aren’t unique, you won’t generate interest. Personalize your communications by adding your achievements. Creating media assets should be a priority.
You can also tell your personal business story. However, you will have to keep it short.
Don’t ignore Analytics
Crowdfunding campaigns work best when you know what to change and when. Analytics can show you the traffic you’re getting and the money you’re making. Being specific about how you will use the money also helps.
Refresh your page
Pages with updated photos and written content are always attractive. Donors want to know the progress of your event or project.
Keep all posts engaging and short. It’s always a good idea to include videos and the latest images.
4 types of crowdfunding platforms for your startup
Maybe you’re looking for angel investors for an equity program or something more low-key. Either way, here is a list of the most common types of business crowdfunding.
Equity crowdfunding allows groups of investors to fund companies and startups. They receive capital to supply cash. Equity-based crowdfunding is different and unique from other types of financing. The business plan here is aimed at a larger group of investors.
Here is a list of some equity crowdfunding sites.
Investors provide capital up front. They will receive the money plus interest.
Get large numbers of people to donate small amounts. There are no promises to repay investors or revenue sharing arrangements.
Startups don’t have to give up equity or capital. Rewards are centered around services or products for sale.
Top crowdfunding sites to raise money
Crowdfunding for small businesses means sorting through crowdfunding sites, like the ones listed here. Be sure to look for the best features, such as marketing tools, ease of use, and customer support. The ones listed below provide proven results for crowdfunding campaigns.
This is one of the leaders in rewards-based crowdfunding. Note that you can raise capital here, but Kick Starter does not fund charitable causes or personal expenses. It is a leader when it comes to crowdfunding websites because it offers Google Analytics integration.
This site is a crowdfunding success at least partially because of its flexibility. Get small business funds raised here with quick and easy setup. Plus, there’s social media integration and no deadlines or targets to get your funding.
It ranks as one of the best crowdfunding sites for early-stage tech startups. Investors are rewarded for contributions. Also, this site is available to both high net worth investors and non-high net worth investors. There is a company-wide minimum of $100.
This crowdfunding site is a little different. It is created for charities and individuals with no start-up fees. The payment partner charges a fee of $0.30 per transaction to process the credit card.
This is crowdfunding for scientific projects and experiments. Payment processing fees here are approximately 3-5% and every submitted project is reviewed before release. Here’s more information on how this crowdfunding site works.
Note that you do not need to reach your crowdfunding campaign funding goal here. There is no cost if you don’t because no one gets paid. Projects in Australia, Canada, the United Kingdom and the United States are excluded.
As a creator, you will never relinquish ownership. Any project you create is always yours.
This is a site that deals with socially conscious projects. Social enterprises, non-profits and community groups are the focus. Here are some common campaigns, such as funding social programs or products. Organizations or individuals looking for money for other things, such as animal vet bills, can use this site.
Any crowdfunding campaign here does not charge commissions to those running the campaign itself. Donors pay payment processing fees of about three dollars for every $100 donation. And if you’re so inclined, you can offer to tip Chuffed.
This is a good equity crowdfunding site for early stage companies. They don’t charge a percentage of what you raise, but only allow accredited investors. It is partially defined as people with incomes of $200,000 and $300,000 in the past two years.
This is not the place for you if you want to raise money for personal issues or causes. These accredited investors also include investment advisers and registered brokers. There is no percentage fee for the amount you raise. However, you will need to pay at least $299 per month to use the platform. This type of monthly fee must be taken into account.
Start-ups should look for features like convertible note financing. It is used when a pre-money valuation that can be converted into equity has not been carried out.
What is a disadvantage of crowdfunding?
There are administrative costs and other issues to consider. For example, some of these sites may take a cut of up to 5%, and there are other fees that may include payment processing of 3-5%.
Think about this before you get involved. Some of the sites like the one just mentioned include monthly payments for subscriptions. Considering all costs means understanding when you can access the funds. Some sites make you wait before you can put the money in your hands. This could be between 60 and 90 days.
Don’t forget that there may be other success costs, such as legal reimbursement costs. These can take 60 days to show and can be an additional 7.5% on a campaign from an equity crowdfunding platform.
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