May 26, 2021 en_US How does crowdfunding work? It involves raising money from other people for a specific cause—like starting your business. https://quickbooks.intuit.com/cas/dam/IMAGE/A3m70RVgt/how-does-crowdfunding-work-feature-us.jpg https://quickbooks.intuit.com/r/crowd-funding/how-does-crowdfunding-work/ The complete guide to crowdfunding

The complete guide to crowdfunding

By Kat Boogaard May 26, 2021

There are a lot of ingredients that go into starting a new business. It’s part creativity, a splash of grit, and a whole lot of determination. Even with all that, most business owners know that there’s still one thing you can’t go without: financing.

Startup costs vary greatly, depending on the type of business you’re launching. But whether you need $1,000 or $100,000, you need access to some amount of capital in order to open your doors.

Where do you find that money? Should you dig through your old jacket and pants pockets? Turn your couch cushions upside down? Finally cash in that jar that’s been collecting all of your loose change? Pursue more traditional funding options like business loans or grants?

Well, yes to all of the above. But there’s one more approach that you should check out: crowdfunding.

How does crowdfunding work?

Crowdfunding is the process of asking for donations from a large group of people (they’re the “crowd”), typically online. It works something like this:

  • You create a campaign on a crowdfunding platform
  • You set a fundraising goal and a deadline for your crowdfunding campaign
  • Other people (known as backers or funders) donate to your campaign

Some crowdfunding sites use a fixed funding model, which means you’re required to meet your funding goal in order to keep the donations. Others offer flexible funding and allow you to cash out whatever money you raise—even if it’s under your goal.

4 types of crowdfunding

That’s the gist of crowdfunding: you’re raising money for a cause or project from a large number of people. However, several different types of crowdfunding fall under that umbrella:

  • Donation-based crowdfunding: You ask for donations from a group of people without offering anything in return.
  • Reward-based crowdfunding: You ask for donations from a group of people and offer them rewards based on the amount of money they donate to your campaign.
  • Equity crowdfunding: You ask for donations and offer backers a percentage of ownership in your business in return for their investment.
  • Debt crowdfunding: You ask for donations with a guarantee that you’ll pay that money back in the future.

There isn’t one form of crowdfunding that’s inherently better than the other. Which approach you opt for depends on your goals and what you’re willing to offer in return for the money your small business needs.

Can you crowdfund for your new business?

The short answer is a resounding yes. Crowdfunding sites are commonly used for charities, nonprofits, and even funding for medical expenses. But plenty of entrepreneurs have financed their new ventures, creative undertakings, new projects, or even new products using crowdfunding.

In fact, several well-known companies got their start on top crowdfunding sites, including:

  • Allbirds: The shoe company started with a Kickstarter campaign in 2014.
  • Brooklinen: The sheets company launched a Kickstarter campaign in 2013.
  • Peloton: The exercise bike and cycling experience rolled out a Kickstarter campaign in 2013.
  • PopSockets: The handy gadgets you stick to the back of your phone started with a Kickstarter campaign in 2012.

These startups went on to become multi-million-dollar companies, proving that crowdfunding can be a worthwhile avenue for starting your business.

How to create a successful crowdfunding campaign: 5 steps to follow

Crowdfunding is a great source of funding and starts you out with a group of engaged backers who are eager to see your business succeed. But in order to get started, you need to know how to pull together a successful crowdfunding campaign for your small business.

1. Understand what you want

Start with the ABCs. Before you launch your campaign into the world, you need to get a grasp on the basics, including:

  • What type of crowdfunding you’ll use
  • Your fundraising goal
  • Your fundraising deadline

There isn’t a set formula to determine how much you need to fundraise. Look at your business plan to see where you intend to take your venture and estimate how much money you’ll need to make that happen.

Do you need specific equipment? Licenses or permits? Staff members? A storefront or facility? Understand what you plan to use the money for and do your due diligence to estimate how much those things will cost.

You want to be as accurate as possible. If you set a goal that’s too high, you have a high risk of not meeting your goal at all. This can be discouraging if you’re using fixed fundraising that doesn’t allow you to keep any of the donations unless you meet your goal. On the other hand, setting a goal that’s too low can mean missing out on money. If supporters see you’ve already hit your target, they might not feel an obligation to donate.

Your fundraising deadline is another area where there isn’t a tried and true equation. Kickstarter suggests 30 days as an ideal duration for a crowdfunding campaign. It’s short enough to keep people interested, but long enough that you have some wiggle room to hit your goal.

2. Choose your crowdfunding platform

You’ll want to create your campaign using one dedicated platform, and there are plenty of crowdfunding sites to choose from. Some of the most popular crowdfunding websites like GoFundMe, Indiegogo, or Kickstarter make the process easy to manage.

It’s important to note that different crowdfunding platforms have different rules, target audiences, and approaches. Do your research so you can choose the site that best fits your crowdfunding needs.

3. Launch your campaign

Regardless of which crowdfunding website you choose, it should walk you through the steps to input your information and publish your campaign. Since you’ve already laid the groundwork, filling in the various fields should be relatively straightforward.

You want to solicit as many donations and appeal to as many backers as possible. Go beyond the basics of your campaign and share the story behind your business and your fundraising needs.

4. Promote your campaign

You created your campaign page, took a deep breath, and hit “publish.” That’s an exciting milestone, but nobody is watching your campaign as closely as you. People generally aren’t constantly scrolling through those platforms looking for opportunities to open their wallets.

Launching your campaign is only half the battle. Next, you need to actively promote it to try to get as many donations as possible (especially if you’re using a fixed fundraising model).

There’s no shortage of ways that you can push people toward your crowdfunding campaign, including:

  • Posting about your crowdfunding campaign on your business and personal social media accounts
  • Including a link to your crowdfunding campaign in your social media bios
  • Creating an email campaign to alert your email subscribers about your crowdfunding efforts
  • Including a link to your crowdfunding campaign in your email signature
  • Putting a banner at the top of your business website that directs people to your campaign
  • Asking your supporters, friends, and family members to share your campaign with their own networks

Self-promotion can feel awkward, especially when you’re asking people for money. But spreading the word is a necessary step if you want to give your campaign the greatest chance of success.

5. Monitor your progress

Creating, launching, and promoting your campaign takes a lot of work, but crowdfunding isn’t a “set it and forget it” business activity.

Throughout your donation period, keep a close eye on your campaign to watch your progress as you pursue your fundraising goal. If you feel like you’re coming up short, you can step up your promotional efforts to hopefully get more dollars coming in.

As you continue to promote your campaign, be honest about how far you are from your goal. This can instill a sense of urgency and responsibility in people who have thought about donating but haven’t taken the step yet.

If you use a crowdfunding model that offers equity or rewards, you’ll also want to monitor exactly how much you’ll need to give in return for donations. You can then prepare accordingly.

5 best practices to exceed your fundraising goal

Creating your crowdfunding campaign is fairly straightforward—it’s figuring out how to inspire people to donate that gets challenging.

An estimated 11% of Kickstarter campaigns finish without ever receiving a single pledge. Yikes! You don’t want to be part of that statistic. Luckily, there are a few strategies you can use to blow your fundraising goal out of the water.

1. Prioritize transparency

In order for people to feel comfortable donating to your campaign, they want to know exactly what their money will be used for. You can’t talk in generalities. Instead, you need to be able to explicitly answer questions like:

  • What does your business do?
  • Who do you serve?
  • How much money do you need?
  • What will you use the money for?

It’s not enough to say, “I need $5,000 to start my business.” Be as specific as possible. Something like, “I need $5,000 to purchase a kiln and a pottery wheel to launch my custom pottery studio in Durham, North Carolina” is far more detailed and forthright. This kind of detail can instill greater trust in your supporters and backers.

2. Tell your story

Honesty and transparency doesn’t have to mean boring. You need to give funders the information they need to decide whether or not they want to donate to your campaign. This is also your chance to appeal to emotions and tell your company’s story.

Get creative and find a unique angle you can share about your business. People will connect with that far more than straight answers and figures alone. Sticking with our pottery studio example, maybe you plan to:

  • Offer arts and crafts classes to at-risk youth in your community
  • Employ veterans who have struggled to find job opportunities
  • Host events to showcase local artists

…or something else entirely. Maybe you’ll share your own background and talk about how you found a love for pottery when you were trapped in a frustrating and demanding corporate job.

Your business has a story that’s worth telling—but it’s up to you to find it and share it in a compelling and engaging way.

3. Get creative with multimedia

When you think about telling a story, words seem like the default option. To make your campaign page even more alluring, it’s worth including some multimedia elements—particularly photos and videos.

For example, you could include photos of the kiln and pottery wheel you intend to buy. Or share a few snapshots of you throwing clay or some of your finished pottery.

Many crowdfunders have also had success with pitch videos. These short, shareable clips provide more detail and context about your business and campaign in a highly engaging, and even inspiring, way.

Here are a few examples of successful crowdfunding pitch videos to get inspired:

Your own video doesn’t necessarily need to have high production value. Even a short clip of you talking about your business can foster a more personal connection with potential supporters.

4. Offer rewards to backers

Opting for reward-based crowdfunding requires offering something in return to your backers—whether it’s a discount code, swag, exclusive access to a product, or something else.

However, even if you don’t choose the reward-based route, providing something special to your funders can be an effective way to show appreciation and increase loyalty.

This doesn’t need to involve a huge investment in time or money. Something as simple as a branded pin or a shoutout on social media goes a long way to show your supporters you are grateful for their donation.

5. Build and maintain relationships

With most platforms, you’ll get the email addresses of all of your backers if your campaign is fully funded. Don’t let that contact information collect cobwebs. Add those supporters to an email list where you can keep them updated with:

  • Thank you messages to show your appreciation for their support
  • Information on how your business performs (and how their donation helped)
  • Access to perks like discount codes or new product announcements
  • Helpful information or resources related to your business and industry

By keeping in touch, you’ll build a community of people who are invested in the success of your business. These people can also double as potential repeat backers if you ever need to crowdfund again.

Crowdfunding can offer your new business cash and community

You need money to start a business. Crowdfunding can help you secure the capital you need while simultaneously fostering a connection with a group of dedicated supporters.

With that said, crowdfunding is by no means a quick and easy way to get financing. Meeting or exceeding your fundraising goal in a way that maintains trust with your backers takes strategy, commitment, and quite a bit of hard work.

But nothing worth having comes easy. That’s true for both your new business as a whole and for the money you need to make it happen.


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Kat Boogaard is a freelance writer specializing in career, self-development, and entrepreneurship topics. Her work has been published by outlets including Forbes, Fast Company, Business Insider, TIME, Inc., Mashable, and The Muse. Read more