Starting a small business can be costly, but did you know that you can use crowdfunding to help alleviate some of those costs?
Our latest infographic, “Is Crowdfunding Right for Your Small Business?,” shows what types of crowdfunding are available and the different benefits of each.
In 2018, the United States alone raised $1.038 billion in crowdfunding. This amount is expected to show an annual growth rate of 10.4%, resulting in a total amount raised of $1.298 billion by the year 2022. From a global perspective, that amount is even higher – China raised $7.463 billion in 2018!
What Type of Crowdfunding is There?
There are three types of crowdfunding options available for your business: reward-based, equity, and debt.
In reward-based crowdfunding, backers are enticed to donate to receive early versions of the product or other rewards. Platforms that most commonly use this type of funding are Kickstarter and Indiegogo. There is no limit on how much a business can raise, and funds are usually available a few weeks to months after the campaign has ended. Businesses can take solace that there is no repayment of the funds raised, but a campaign could rack up 8% to 10% in fees.
Through equity crowdfunding, individuals are given the option to invest in a business in return for a share of the company. Through this method, businesses can only receive up to $1.07 million, and it typically costs between 3 to 6-percent in fees, with an additional $10,000 to $100,000 in professional fees.
The last option available is through debt, where backers can provide businesses with loans in exchange for interest. The interest rates can range anywhere between 5% to 27%. Businesses are able to receive up to $500,000 through loans and can expect to see the funds within a few weeks or months. Debt is the only crowdfunding that requires repayment. Payment is due monthly and continues throughout the loan term, which can be anywhere from six months to five years.
Kickstarter Success Rates
Since Kickstarter’s inception in April 2009, they have successfully funded 36% of all launched projects. Some of the most popular categories on Kickstarter have been design, fashion, food, and technology. The success rates and amount raised vary by category:
- Design has a 35% success rate
- Fashion has a 25.8% success rate
- Food has a 24.8% success rate
- Technology has a 19.9% success rate
Tips for Success
Research similar campaigns. You want to be able to analyze what is working on highly funded projects and what went wrong on failed campaigns.
You also need to choose the right crowdfunding platform and goal. There are many sites to choose from, but Kickstarter, Indiegogo, GoFundMe, Publishizer and Patreon are some of the most popular. Each site has a different audience and campaign options so it’s important to do your research. For example, GoFundMe generally focuses on causes and nonprofits, so you wouldn’t want to use this platform to gain backers on a video game product.
Share your unique story. Let potential backers know who you are and what you’re planning to do. Tell them how you thought of this idea and why you’re passionate about it. By providing this information, it helps show the legitimacy and credibility of your project.
Compel your audience with engaging content like photos and video. You could even share your story entirely through a video. You’ll also want to share photos of the product, so backers have a better understanding of what it is. Depending on how far along you are in developing the product, you can even share videos of it in action.
The last thing you need to do is promote your campaign! There are many ways to let people know about your campaign:
- Use social media to spread the word
- Ask your friends and family to share the campaign
- Involve your community by hosting events to increase interest
As you start gaining backers, you’ll want to update them consistently as your project progresses. Most platforms have tools that allow you to send messages to your project backers. When sending these messages, be sure to stay transparent. If things aren’t going exactly as planned, it’s good to let everyone know.
Once the campaign is over, the crowdfunding success creates everlasting benefits such as:
- A strong customer base
- Greater publicity
- Higher likelihood of external financing
- Increased chance of business partnerships
If you believe crowdfunding is right for your business, reach out to a SCORE mentor today to help develop a plan.