You have a great new business idea, but raising money for it can be difficult, and that can slow the momentum of your venture. The main obstacle may be the amount of money you need. Large sums of capital may be intimidating to investors, especially when it comes to an untested, early-stage company.
Despite liking a business idea, these investors may not see a clear enough path to the sort of big profits that justify a large loan. Successful investors always weigh risk against rewards before plunging in.
What is business crowdfunding?
Thanks to the Internet, an alternative for entrepreneurs seeking investment money has emerged and is thriving. Crowdfunding allows businesses to pitch their ideas to a potentially vast audience via websites designed to connect them with investors. One additional major benefit: Crowdfunding helps them secure investment dollars without relying on one source. Instead, businesses may aggregate smaller amounts from a few or many different individuals and small groups.
For these so-called retail investors, the payoff is the chance to learn about investment opportunities that were formerly limited to bigger banks, private equity groups and venture capitalists. They can get involved with as little as a few dollars and possibly be part of the next Apple or Facebook.
A hot trend
Small business crowdfunding has been a hot trend over the last few years – stoked by a bevy of startup success stories, particularly in the technology sector. For example, Occulus Rift, a California-based manufacturer of virtual reality headsets, raised $2.4 million via the crowdfunding site Kickstarter. Facebook later acquired Occulus Rift for a reported $2 billion.
This trend doesn’t seem to be ending any time soon. The research firm Massolutions says there are now more than 600 crowdfunding sites worldwide, while the World Bank estimates that crowdfunding will generate about $96 billion in investments worldwide by 2020.
Understanding crowdfunding for businesses
Most commonly, crowdfunding offers special incentives in exchange for donations. Such perks can include anything from a mention of your name in credits on a film to a chance to obtain a free product or to hear personally from an author. Offering these perks can also be a way to avoid lending fees, interest payments and giving away company equity in exchange for the loan.
Many potential investors find the transparency of crowdfunding attractive. Companies are making their financial information, strategies and goals readily accessible on crowdfunding platforms, which helps potential contributors feel comfortable being a part of business crowdfunding.
As is the case with every facet of business, thorough preparation increases the likelihood of success. For entrepreneurs who want to use crowdfunding for their small business, building momentum before they post their ideas on a site is important. That means creating a good pitch for their business – one that not only informs potential investors but engages them.
Before you present a venture on a crowdfunding site, ensure there’s demand for a product (or service) and determine the best way to market it. Clearly communicated evidence of potential demand is more likely to draw interest from investors. Some initial marketing outreach can create the sort of buzz that investors prefer to see as they analyze different crowdfunding pitches.
Setting up a business crowdfunding page
Start by building a standalone page, known as a lead capture page, to provide basic information about your small business prior to the launch of a crowdfunding campaign. Some successful launches include enticing offers, such as a contest, to get users to input their email addresses. Think of these as virtual equivalents to a signup sheet or fishbowl on the counter of a bricks-and-mortar store where customers provide their information in exchange for possible prizes. They can generate a list of interested people you can send to the crowdfunding site.
Most of all, don’t get greedy when setting up your funding goal. Even if $500,000 will make your launch infinitely easier, shoot for a smaller amount that you can reach early on and that will still help you.
This is important, because reaching financing milestones is another way to help attract other investors and to create momentum around your venture. Once your business starts thriving, you may garner the attention of a wider audience that may enable you to raise money in subsequent rounds of funding and, ultimately, increase sales.
If you think crowdfunding for your small business may be a good fit, read more about the 5 considerations for small businesses using crowdfunding.
For more information and resources to help your company grow, check out the Small Business section of the Learning Center.