How to leverage crowdfunding for business

Where traditional fundraising methods are not suitable or available, crowdfunding for business may be a viable and powerful alternative. Over recent years it has evolved from being an informal, often community-driven method of financing, to one that has become more structured and underpinned by technology.

Crowdfunding is the process of receiving donations from the public to use for a specific reason, for example, starting or expanding a business. These funds are immediately earmarked for use and the fundraiser must follow through with this if the goal is met or exceeded.

Read on to understand more about what crowdfunding is, strategies for employing it, and how to make it work for a business.

How does crowdfunding work?

If business loans are not an option, business owners may turn to crowdfunding to reach their goals.

Crowdfunding involves requesting contributions – or investments – from the public to allow the business to meet a specific goal. This could be to develop a new product, to market an existing one, or simply to provide the capital to start the business. In return for their contribution, investors could be offered rewards such as micro-shares in the company or something more tangible, such as the product itself, if the end goal is met.

Here are a few examples of businesses that found success through crowdfunding:

• Fidget Cube, the addictive desk toy, raised over $6million and found its way into the palms of adults and children alike. ¹
• The Wyrmwood Gaming Table, complete with magnetic accessories, raised an astonishing $8.8million.²

What happens if the fundraiser misses its goal? In some cases, all money is returned to contributors, and everyone involved goes their separate ways.

Businesses that use crowdfunding typically reach out to their personal and professional networks and use technology platforms and social media to reach a wider audience.

The global crowdfunding market was estimated to be $17.2bn in 2022 according to Market Data Forecast³ and is set to grow to $32.9bn by 2028, making it an increasingly important source of funding. ⁴

Crowdfunding advantages and disadvantages

Before deciding if crowdfunding is right for a company, business owners should consider the pros and cons.

Advantages

• Raise funds without interest-heavy loans: Capital raised through crowdfunding may not be subject to the interest rates that a standard business loan is. Bear in mind, however, that the technology provider will usually charge a fee for the service.

• Crowdfunding can generate marketing: Sharing a campaign could mean more marketing content for the business. Updates, rewards, and reminders can all be shared through social media and email channels, spreading the word and potentially gathering more investors.

• Investors can help to build a community of supporters: Crowdfunding enables businesses to build a support network around their idea of product. When investors are drawn in with the promise of rewards, they may become more emotionally and financially invested in the business. Regular updates help the contributor feel part of the team. Additionally, having several investors can help legitimize a company.

Disadvantages

• Host platform charges: There are a variety of hosts offering crowdfunding campaign services to businesses. Many of these come with charges.

• There’s no guarantee of success: Unlike traditional business financing, such as bank loans, there’s no guaranteed sum of money at the end of the crowdfunding process. A failed attempt can be disheartening and, despite promoting the campaign as much as possible, there’s little businesses can do to guarantee that they reach their fundraising goal. Business owners considering crowdfunding should plan for the eventuality that their goal may not be reached.

• Crowdfunding can be labor-intensive: Keeping track of donations, investors, and rewards is time-consuming. Businesses should ensure they have the necessary resources available to accurately track each part of the crowdfunding campaign even in the post-crowdfunding phase.

Types of crowdfunding

There are several types of crowdfunding to choose from, depending on the small business’s funding goal. Read on to find out what separates them and how to determine the most appropriate path to take.

Rewards-based

As the name suggests, this form of crowdfunding campaign offers contributors rewards, such as the product or service the business will offer. For example, an apparel business may offer exclusive stickers of upcoming designs or early samples of the merchandise.

Equity-based

Choosing equity-based crowdfunding entitles investors to shares in the business in return for their donation. This can work well for startups that project substantial growth. However, business owners should bear in mind that it’s subject to specific laws. They should also decide if they are willing to lose some ownership of their business.

Donation-based

A popular type of crowdfunding, this form relies on contributors donating while expecting nothing of financial value in return. This is often used by charities or in community campaigns.

Debt-based crowdfunding

More aligned with a traditional business loan, debt-based crowdfunding involves borrowing from peers and could be subject to interest rates.

How to crowdfund a business

Though no two crowdfunding campaigns operate exactly in the same way, there are steps that business owners should consider before they decide to go ahead. Here are a few areas of importance.

Create a compelling campaign mission with clear perks

Before starting anything else, business owners considering crowdfunding should ascertain their end goal. This could be to start trading, update a product or simply stay in business.

Once determined, the mission should be translated into a compelling story that draws contributors in and shows them why and how investing could be the right step for them. Make sure any perks or rewards are laid out clearly at this stage too.

Choose the right crowdfunding platform

Popular crowdfunding platforms may have specialties that business owners should consider. GoFundMe focuses on donation-based crowdfunding, while Kickstarter leans towards a rewards-based model. Consider all the options and choose the one that best suits the purpose of the business.

Make sure the funding target is appropriate and attainable

The funding target is more easily reached if it’s appropriately estimated. Business owners may want to err on the side of caution as, in some cases, a failed crowdfunding campaign could mean the business receives nothing at all, despite months of hard work. The target should be high enough to make real change, but low enough to be attainable.

Use marketing techniques to promote the campaign

Marketing techniques will drive awareness of the campaign and could boost its chances of success, as well as building an audience of potential customers.

Maintain transparency by engaging with supporters

This step is key. Contributors want to know how the journey’s going, particularly if they’ve become emotionally or heavily financially invested. Transparency is essential after the campaign is over, too, as supporters will be keen to know the next steps, such as rewards lead times, for example.

Navigating the post-crowdfunding phase

After months of hard work, the campaign is over, and the business can enjoy the fruits of their labor by way of the funds raised. But the funds may not be released immediately, with times varying from provider to provider while they conduct audits, offer contributors a cool-down period, or perform any other admin they deem necessary.

The post-crowdfunding phase of a business’s journey may be a time for celebration, but it’s certainly not the time to rest on the laurels of success. Plans should be made for the use of funds, allocation of shares, distribution of rewards. All this should then be communicated to the investors.

If the goal is not met, then challenges will arise around how to find alternative sources of funding. Additionally, it is a time to reflect on the lessons learned in the crowdfunding process should another attempt be considered.

Is crowdfunding the right option?

Leveraging crowdfunding could pave the way for a brighter future in business. Compose a successful campaign, and businesses could thrive with the backing of engaged, invested customers. However, first, business owners should be aware of the risks, such as an unsuccessful crowdfunding attempt, and take steps to mitigate any fallout.

Whatever your business finance needs, choosing the right platforms to partner with is key. Discover how PayPal for business can help make businesses reach their goals.