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Crowdfunding for Business: Is It for You?

By Susan Edevane

2 min read

Many small businesses and startups struggle to secure traditional bank loans. Banks turn them away because they can’t show a lengthy track record of profits – but how is any brand-new startup supposed to demonstrate that?

Crowdfunding is a means of financing your business by appealing for donations from internet users. You promise these backers a reward for their donation, such as an early, discounted purchase when your product or service is ready to go on sale. Some examples of successful campaigns include:

  • Sense, a company planning to manufacture a sleep-quality monitor, met its US $100,000 goal within hours on Kickstarter, raising over US $2.4 million in total
  • The Kickstarter campaign for the original Pebble smartwatch raised over US $10 million and the next-gen Pebble Time raised over US $20 million
  • Australian startup Flow Hive raised over US $12 million on Indiegogo for its innovative honey-collecting beehive

The advantages of crowdfunding include a committed customer base and the ability to evolve your product based on customer interaction. Sense planned to create a product with a non-removable battery, to enable better waterproofing, but customers were unhappy with this idea. So the company went back to the drawing board and found a way to use replaceable batteries instead.

Another major benefit is that you still own your business in full: investors don’t get shares. You’re also not obligated to commit to your project if you don’t receive the funding.

On the flip side, you may not reach your funding goal in time. You’ll also have to spend a lot of time promoting your crowdfunding campaign, as most don’t easily go viral. There are thousands of other businesses out there seeking crowdfunding from the same internet community, which makes the process very competitive.

Plan Your Campaign

Before you leap in, you need to very carefully plan your crowdfunding campaign. Consider why people would want to fund what you’re developing – what’s unique or innovative about it? You need to think like a marketer so that you can reach out to receptive audiences. For example, the creator of the Veronica Mars TV series targeted fans of the show via Kickstarter, with 91,585 backers raising $5.7 million to make a Veronica Mars feature film.

Plot Your Progress

Knowing how much you want to raise, and the time frame for it, is critical. Work out how long it will take you to develop your project once you’ve met your funding goal. It’s okay if there are delays, but you’ll need to keep backers from grumbling by being as responsive and transparent as possible.

Pick Your Platform

Finally you need to decide what crowdfunding platform would suit you best. Crowdfunding sites are springing up all over the place and it can be a confusing choice. Kickstarter is the biggest, but there’s far more competition on there to reach people. Some crowdfunding sites specialise in certain niches or they may only accept certain kinds of business ideas.

Rules vary: some have upfront fees, others require you to raise your funds in a set timeframe, then take a percentage; some have an all-or-nothing approach that means you receive nothing if you don’t reach your target, others are flexible. Do your research and figure out the best site for your campaign.

The global crowdfunding market is forecast to reach US $34.5 billion in 2015, up from $16.2 billion in 2014 and $6.1 billion in 2013. That’s huge growth and a big pot of money. Getting access to it may be challenging, but if you’re successful it could make your business dream a reality.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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