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Crowdfunding: A Rainbow of Opportunities ... With a Pot of Gold at the End?

By Eileen Corbett, JD, LLM | March 08, 2013

If you’ve been seeing more red than green in your business lately, it might pay to check out crowdfunding. People have used crowdfunding to post campaigns for projects ranging from film development to brewery remodeling.

Crowdfunding attracts a multitude of people (i.e., the “crowd”) who each contribute a small amount to an online funding target for a project. In this sense, it presents entrepreneurs with a creative alternative to more traditional notions of seeking large amounts from a small number of sources.

In the not-too-distant future, it is possible that crowdfunding could also provide financing opportunities for small businesses. The subject received Congressional attention last year in the Jumpstart Our Business Startups Act (JOBS Act), which included provisions that would allow up to $1 million in financing via crowdfunding. However, the law is still being implemented and, as of this writing, SEC regulations on the issue are forthcoming.

Warning

The implementation of last year’s federal legislation is still underway. Also, state rules may affect the availability of any crowdfunding options. If you’re thinking about crowdfunding, be sure to consult an attorney well-versed in this area before taking any action.

In the meantime, remember the Scout motto and “be prepared” for potential crowdfunding opportunities. Posting a successful campaign requires preparation and effort.

Work Smart

The crowdfunding concept is both creatively named and implemented in various formats. Arrangements applying the “cash from a crowd” concept include crowdsourcing, crowdfinancing, peer-to-peer lending, crowd sourced capital, or a similar description.

What Is Crowdfunding?

A crowdfunding campaign typically involves a well-defined project with a goal. The project is posted on a crowdfunding platform. Some of the more popular platforms, among the many that exist, are Kickstarter and Indiegogo. When you post your campaign on the platform site, you state how people (i.e., the crowd of site visitors) can help, which is usually by making a small monetary contribution toward your funding target. Why would someone choose to contribute to a total stranger’s campaign? A variety of reasons exist for contributing, but generally they are tied to the theme of somehow being part of a worthwhile and valued endeavor. For example, contributions could

  • Help develop lifestyle improvements (e.g., lighting) for people in developing countries
  • Help a local artist achieve the dream of having some space in a bricks-and-mortar store
  • Help produce a film
  • Help a favorite band record a new release

The crowd of readers who visit the platform website can each contribute a small amount toward the target, if they choose to do so.

In your posted campaign, you also list the benefits for contributors. They may receive anything from the personal satisfaction of having helped someone achieve a dream, to attending an exclusive “preview” party, to lifetime privileges. The reward for contributing varies incrementally with the amount contributed. For example, contributors of $1 or $5 might receive a photo or name recognition on a website, contributors of $50 or $100 might receive discounts on products or a limited amount of free services, while contributors of $1,000 or $2,500 might receive a lifetime club membership or a private performance. Other popular “thank you” items include autographed project memorabilia and emblematic T-shirts.

Fees and Costs

The campaign guidelines and fee structures of the various crowdfunding platforms vary by platform. Typically, fees are in the neighborhood of 4 or 5 percent plus processing fees. What happens if a campaign receives contributions, but does not reach its goal? Some platforms, like Indiegogo, allow you to keep the contributions but pay a higher fee. Others, like Kickstarter, implement an all-or-nothing model. Thus, the choice of platform may depend on which type of structure is best-suited to a particular goal or project.

Work Smart

Be sure you do your homework before initiating a crowdfunding campaign, including reading the platform guidelines and planning your campaign from start-to-finish before it is launched.

Additional Benefits

Crowdfunding presents other benefits aside from funds.

Spreading your message. A crowdfunding campaign can not only help bring in some needed cash for a project, it can also help spread the word about your business. Some project creators ask readers to help with a nonmonetary “contribution” of forwarding the project’s page to the reader’s social media friends and relations.

Work Smart

The marketing potential of crowd supporters spreading the word about a project should not be underestimated. Just one reader alone might forward a campaign to hundreds of contacts and friends. This aspect of crowdfunding could exponentially help you gain exposure that otherwise might be very difficult to achieve.

A successful campaign could help bolster your business in the eyes of your customers, including those who do not participate in crowdfunding. It also might provide a newsworthy story for local press.

Gauging customer reaction at the “idea” stage. Posting your campaign on a crowdfunding platform provides you with direct feedback from the crowd of potential customers. It gives entrepreneurs the opportunity to pitch a new idea to folks before taking any costly implementation steps.

Tip

Even if a project “flops” and the goal is not met, that result could still be beneficial to an entrepreneur. Although disappointing, the “free” feedback could save an entrepreneur from the financial pain of pursuing and funding an ultimately lackluster idea. On the other hand, a successful campaign could provide additional information and direction on avenues to pursue in the future.

Strategies for Successful Campaigns

Before launching a campaign, it is critical to plan ahead. The project’s goal should be clear and attainable. A good idea is to browse platforms to evaluate the campaigns that have succeeded or failed in the past.

Helpful tips for a successful campaign include:

  • Tell your story. The more you can “humanize” your story, the better the crowd will be able to relate to it. Readers should have a good reason to help you, as opposed to others with similar campaigns. Providing a video helps others learn about you and your project.
  • Communicate your dedication. Share your achievements to date related to your goal. How committed are you to this goal? What efforts have you put forth so far in order to achieve it?
  • Run the numbers. Know before you ask for funds what it will take to achieve the goal. You have to be able to deliver. Also, tell the crowd how their money will be spent.
  • Keep it simple. Communicate your idea in a way that is simple and easy for the crowd to understand.
  • Keep the momentum going. You’ll have to promote your pitch and be able to answer questions on a regular basis. Plan ahead for how to create a buzz for your campaign and how you will inspire others to contribute or to forward your message. Also, during the campaign, post updates on progress to date.

Once the campaign is over, be sure you provide the rewards or perks you promised. This could be done as contributions come in. After the campaign, thank your contributors and post updates on the successful attainment. Also, consider a follow-up campaign.

Think Ahead

Proper planning now could help once the JOBS Act is fully implemented. This includes getting accounting records complete and accurate, and having a business plan in place. Talk to your advisor about what you can do now to prepare for success later.

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