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5 considerations for small business funding through crowdfunding

Man and woman sitting at a coffee table reviewing business crowdfunding options

"Rewards crowdfunding is now the new seed-funding," says Barry James, founder of CrowdFund Insider. Amounts raised by this donation and reward model increased 25% in 2015 over the previous year, according to the CrowdFund Insider data, and it’s expected to continue growing.

Most people think of Kickstarter as the crowdfunding model, with money donated for specific projects or products, often with a reward as "payment." In 2015, $5.5 billion was raised globally via this model, according to Massolution. But there are other effective types of crowdfunding including equity crowdfunding (selling partial company ownership through online sites) and peer-to-peer lending (crowdsourced loans from lenders who aren’t financial institutions). 

How can a business profit from the reward and donation crowdfunding model? Here are 5 considerations:

1. What platform to choose?

With hundreds of crowdfunding platforms available, it’s important to choose the right one. It pays to do some research, choosing from the best crowdsourcing sites with proven track records in that industry, offering similar incentives. Also, it’s important to find one with the right user demographics. The most popular sites are Kickstarter and Indiegogo, but there are others that might be a good fit as well. 

One important consideration is whether your company gets the money raised even if it doesn’t meet its goal. Some platforms allow companies to access any money raised while others follow the all-or-none model. The latter can be devastating if the campaign doesn’t hit the target.

2. What’s the platform’s fee?

Each site has its own fee structure. Sometimes that fee is different if the campaign fails to meet its goal. Expect to pay 5% to 10% of money raised just to use the site, plus credit card processing fees.

3. How to structure donation perks?

In the reward crowdfunding model, the funder often gets a perk in exchange for the donation. This can be a certificate, like a virtual pat on the back, or multiple products when they’re finally manufactured. 

But rewards and shipping can easily gobble up the proceeds. It’s possible to lose money on rewards, especially if the campaign doesn’t reach its goal. Don’t underestimate the amount of time needed for reward fulfillment and tracking, time that might be better spent on marketing or development.

4. Before the campaign is live

Raising money on crowdfunding sites can be time consuming. Before the campaign begins, the company should clearly define its goals and develop a professional-looking video explaining how the money will be used and details about the project or product. This should also be clearly written out in the campaign text. 

Develop a list of potential funders to target and begin publicity early. The campaign shouldn’t come as a surprise to those who already know about the company. Include not just current customers and friends but industry influencers and media that can help spread the word and possibly contribute as well. 

5. What to do during the campaign

Once the campaign is live, the fundraising work continues full force throughout the duration. Keep awareness up through social media as well as email updates to current and potential funders. People are more willing to back a campaign that starts out successfully than one that lags, so the initial push should be huge. Don’t underestimate the amount of time required after the campaign is over to fulfill rewards and stay in touch with donors. The business’ reputation is on the line.

Crowdfunding can be an exciting and public way to announce a new venture and raise money for it. But many crowdfunding campaigns fail, so it’s important to be ready to focus the time and energy needed to make the campaign a success.

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