Crowdfunding for small business: Getting started
If you’re considering crowdfunding as a way to finance your business project, here’s how to get the ball rolling.
You’re intrigued by the concept of crowdfunding for your product or project idea; now, how do you go about raising funds?
Step 1: Define your needs
What is it that you want to fund? Is it to get your business idea off the ground, or is it a project within your existing business, such as an event, writing a book or the development an additional product?
The truth is, you can source crowdfunding for pretty much anything – so long as people want it! From niche inventions to iPhone apps and business website ideas – the sky really is the limit. The buck stops for Australian business owners, however, when it comes to investment crowdfunding (where financial rewards are offered to those who pledge money).
While business start-ups in the US an UK are freely able to source investment funding through crowdfunding websites, in Australia this may impose legal obligations, which if breached can result in a fine of up to $22,000 or five years’ imprisonment (or both). Read more about ASIC’s position on this matter here.
"The truth is, you can source crowdfunding for pretty much anything – so long as people want it!"
An example of a big-name crowdfunding success story is a project run by marketing expert Seth Godin.
Godin recently launched a crowdfunding project on Kickstarter for his forthcoming book The Icarus Deception. In return for pledges ranging from $4 to $1150 he offered supporters various rewards, such as obtaining the book faster and cheaper – to the top reward of having their story told within the book.
Step 2: Find the right crowdfunding platform
There are hundreds available, many of which are niched by industry, location or discipline, or offer a specific variation of funding model. The good news is that most of these sites have success case studies to evaluate, so you can gauge from these whether the platform will be a good match for your business and project.
Want more articles like this? Check out the business startup section.
Step 3: Choose a crowdfunding model
There are basically two types of crowdfunding models:
- All or nothing: When the campaign period is finished, only if the fundraising goal is met will any money pledged be collected. If the goal is not met then no money is collected.
- Keep it all: Whether the fundraising goal is met or not, the entrepreneur is able to collect all of the pledged funds (minus crowdfunding website commissions). It is up to the entrepreneur what to do with the funds (e.g. give a refund) if they do not raise enough to meet the objectives of the project.
The “all or nothing” approach is a low-risk model that protects both the creator and the backer. Supporters have reassurance their money will be used for a fully funded project, or else returned to them. This low level of risk also makes it more attractive for them to make a contribution. The creator on the other hand has reassurance they won’t have to fulfil financial promises to backers unless they reach the full funding amount. The downside is if the funding goal is not reached, creators are back to square one.
The “keep it all” approach is great for the creator, who can treat every contribution like money in the bank. However, it is high risk for the backer since they may lose their money to an under-funded project, which may deter people from supporting it in the first place.
Deciding on the best option for your business depends on your flexibility and budget. If you need a specific amount of money by a set date to carry out your project, then “all or nothing” would suit. If you’re committed to the project already and would benefit from topping up your funding, then “keep it all” may be better.
The next steps in the crowdfunding process involve developing a successful campaign and attracting, rewarding and retaining your audience. Godin had a head start with his project, leveraging what referred to as his “tribe” for financial support. He didn’t need to build a tribe, which is where most soloists are starting – and which is what will be covered in the next instalment of this series.
Are you considering launching a crowdfunding project? What are your biggest concerns? Please share in the comments.