What is Crowdfunding?

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Finding the money to turn your vision into reality is often the most challenging part of a startup. Traditional financing options, from bank loans to angel investors, can be difficult to navigate and might cost you at least some control of your business. A crowdfunding campaign, which raises funds through the internet and social media instead, can give you a way to circumvent those obstacles.

What is Crowdfunding?

Crowdfunding stands traditional financing on its head. Instead of raising substantial sums of money from a small number of investors, you ask for small sums of money from a large group of investors. Crowdfunding makes investing accessible to everyone on the internet, in much the same way Ford's inexpensive Model T changed cars from a luxury item to a commodity most people could afford. Finding people to back your idea with a few hundred dollars – or even the price of a few lattes – is much easier than finding investors willing to take on a six- or seven-figure stake.

How to Crowdfund for Business

It's important to understand that crowdfunding is not a computerized magic wand. You may have built the proverbial “better mousetrap,” but the world will not beat a path to your door unless you have a clear and compelling pitch that stands out on the crowded internet. Potential investors must feel confident in backing you.

If you've had successful startups, list them. If you have an advisory board of locally prominent businesspeople, emphasize it. If your product is already selling well or has been the subject of positive press, play that up. Most of all, the pitch for your product or service should leave your target demographic thinking, "Wow, I really want to get in on that!"

What's In It for Your Investors

What you offer in return for investments will vary depending on your company, your product and the dollars you're asking for. Often, it's tangible rewards of some sort, usually on a sliding scale that rewards higher investment. At the lowest level, inexpensive swag such as a commemorative T-shirt or ball cap might be enough. Fans of the television series "Veronica Mars," who famously raised millions for a film sequel, were offered a spot in the cast for a donation of $2,500. You could offer your product or at least discounts on your product. Another option is equity fundraising. Instead of a T-shirt or production sample, equity fundraising offers a small stake in your company as a reward. It could be thought of as a "lite" version of taking your company public, with fewer regulatory hurdles.

Crowdfunding Sites and Fees

Among the hundreds of crowdfunding sites, a handful are more prominent than others. Kickstarter and Indiegogo are the industry's standard-bearers focusing primarily on rewards-based campaigns. Fundable, Crowdfunder and their peers focus primarily on equity crowdfunding. Patreon and similar sites are geared toward artists, artisans and other creators. There are variations in the respective sites' fees and conditions. Their business model consists of taking a percentage of the dollar amount raised in successful campaigns. The 2018 fees for major players Kickstarter, Indiegogo and Patreon are 5 percent, plus any applicable payment processing fees. In most cases, if you fail to meet your fundraising goal, the money won't be collected. This forces you to think long and hard about your goal and how to make it attainable. A multistage campaign, with smaller "milestone" goals, can be easier to finesse than a single large campaign.

It's More Than Money

Raising money is the primary goal of crowdfunding and a good campaign can potentially do wonders for your project and enhance your business. Interacting with your supporters, or target market can help you refine and improve your product dramatically before it comes to market. It's also a "rubber meets the road" test of your product. Feedback from your campaign will make any glaringly obvious problems apparent.

On the positive side, if your product goes viral and backers are clamoring for it, you've gained the equivalent of a successful marketing campaign for the cost of your crowdfunding fees. This also makes it easier to secure conventional funding in future because you can demonstrate a demand for your product.