How does crowdfunding work? 5-step guide for small businesses

There are a lot of ingredients that go into starting a new business. It takes creativity, hard work, and determination. Even with all that, many businesses won’t succeed without some form of financing. One-in-10 small business owners say that getting financing is their primary goal for this year, according to the QuickBooks entrepreneurship survey. Where do you find that money? 

There are more traditional business funding options like business grants, but if you have a unique idea or innovative project, you may consider crowdfunding. Let’s look at how crowdfunding works, the different types, and how to run a successful campaign:

• Types of crowdfunding
• Pros and cons of crowdfunding
• How to create a crowdfunding campaign
• Picking a crowdfunding platform
• Tips for hitting your crowdsourcing goal
• What are your funding options?

Types of crowdfunding

When you do decide to crowdfund, you have various options. Here are the different types of crowdfunding to consider: 

• Donation-based crowdfunding: You ask for donations without offering anything in return. Popular donation-based crowdfunding platforms include GoFundMe and Indiegogo. 
• Reward-based crowdfunding: You ask for donations and offer them rewards based on the amount of money they donate. For example, one of the most popular rewards-based platforms is Kickstarter. 
• 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.

Pros and cons of crowdfunding

Crowdfunding has become a popular alternative financing method, but it has both advantages and disadvantages. Here are some of the pros of using crowdfunding campaigns: 

• Market validation: A successful crowdfunding campaign serves as strong proof of concept and market demand for product ideas. It demonstrates interest in your offering, attracting potential investors and partners who might have been hesitant otherwise.
• Marketing and exposure: Campaigns generate buzz and media attention. The storytelling aspect of campaigns, combined with social media sharing, can boost brand awareness. 
• Community building: Crowdfunding can foster a sense of community and loyalty among backers. These early supporters often become brand advocates, providing valuable feedback and spreading the word. 

On the other hand, crowdfunding disadvantages include: 

• Campaign management: Running a successful crowdfunding campaign requires effort and resources. Creating compelling campaign materials and managing communications with backers can be time-consuming. 
• Platform fees: Crowdfunding platforms typically charge fees for their services, which can eat into your fundraising total. These fees vary depending on the platform and the type of campaign.
• Reputational risks: A failed crowdfunding campaign can negatively impact your reputation. Potential investors and customers might perceive it as a lack of market interest. 

Note that unlike traditional loans, where borrowers are personally liable for repayment, crowdfunding typically does not require personal guarantees or collateral. 

How to create a crowdfunding campaign

To get started, you need to know how to pull together a successful crowdfunding campaign for your small business. Here are the five steps to creating a campaign:

1. Understand what you want and need

Start with the basics. Before you launch your campaign, you need to get a grasp on the basics, including your fundraising goal and 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. For example, consider: 

• Do you need specific equipment? 
• Will you need to hire staff members? 
• Do you need licenses or permits? 
• Will you need 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.

2. Choose your crowdfunding platform

You’ll want to create your campaign using one dedicated platform, and there are plenty of platforms to choose from. 

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

Launching your campaign is only half the battle. Next, you need to actively promote it to try to get as many donations as possible. 

Some key ways to promote your crowdfunding campaign include: 

• Use social media marketing to post about your crowdfunding campaign on your business and personal social media accounts
• Include a link to your crowdfunding campaign in your social media bios
• Create an email campaign to alert your email subscribers about your efforts
• Put a banner at the top of your business website that directs people to your campaign
• Ask your supporters, friends, and family members to share your campaign with their networks

Self-promotion can feel awkward, especially when you’re asking people for help. But spreading the word is necessary 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” activity. 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 bring in more dollars.

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.

Picking a crowdfunding platform

Choosing the right crowdfunding site and platform is crucial to the success of your campaign. The platform you select will serve as your virtual storefront, directly impacting your ability to reach potential backers and effectively communicate your project's value proposition. 

A well-chosen platform will empower you with the tools and resources needed to launch, manage, and ultimately achieve your fundraising goals. 

Here's a breakdown of key factors to consider when selecting a crowdfunding platform:

• Pricing and fee structures: Crowdfunding platforms typically charge as a percentage of the funds you raise. Be sure to understand the fee structure before launching your campaign, as it will directly impact your net proceeds.
• Ease of use: The platform should be intuitive and user-friendly, allowing you to create and manage your campaign with ease. Look for features like drag-and-drop editors and customizable templates. 
• Customization options: Your campaign page should reflect your project's identity. Choose a platform that offers customization options, allowing you to tailor the page's layout, visuals, and messaging to align with your brand.
• Project suitability: Different platforms cater to specific project types. Some specialize in creative projects, others in technology or social causes. Research platforms are known for success in your project's niche. 
• Community and reach: A platform with a large and engaged community can significantly boost your visibility. Look for platforms that actively promote projects to their user base and have a strong track record of successful campaigns.

Select the crowdfunding platform that aligns with your project's unique needs and goals, setting the stage for a successful campaign. The right platform can serve as a valuable partner in your journey.

Tips for hitting your crowdsourcing goal

Creating your crowdfunding campaign seems fairly straightforward—figuring out how to inspire people to donate is the challenging part. However, 9% of Kickstarter campaigns end without receiving a single pledge. Luckily, there are a few strategies you can use to blow your fundraising goal out of the water.

Prioritize transparency

For people to feel comfortable donating to your campaign, they want to know exactly where their money will go. Avoid talking in generalities. 

You need to be able to explicitly answer questions like:

• What does your business do?
• 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.

Tell your story

Honesty and transparency don’t have to be boring. You want 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 share how you’re building your brand.

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. Your business has a story that’s worth telling, but it’s up to you to find it and share it compellingly and engagingly.

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. Many business owners have also had success with pitch videos. 

Here are a few examples of successful crowdfunding pitches: 

• Hop Stuff Brewery pitch video
• Peloton pitch video
• Pulp pitch video

These short, shareable clips provide more detail and context about your business and campaign in a highly engaging—and even inspiring—way.

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 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.

Build and maintain relationships

With most platforms, you’ll get the email addresses of all of your backers if your campaign is fully funded. Use that information to improve your customer relationship management. 

Add 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.

What are your funding options?

Crowdfunding can help you secure the capital you need while simultaneously fostering a connection with supporters. With that said, crowdfunding is by no means a quick and easy way to get funding for your business. 

After figuring out how crowdfunding works, you may decide that other forms of financing would be a better fit for your business. Consider flexible funding options like term loans and lines of credit for expansion and growth.