The search for funding to get a small business off the ground can be a complex and frustrating experience. But we’ve moved well beyond the days of a bank loan being the only way to do it.
One of the more talked about methods of raising money is crowdfunding, in which a prospective owner lays out the plan of the business and then seeks online donations. In the primary forms of crowdfunding, those who donate can receive some sort of reward for their donation (products, discounts, recognition), or equity in the company (like the concept used in ABC’s investor program Shark Tank).
There can be significant advantages here, as Adam Heitzman writes for Inc.com: “With crowdfunding, you don’t have to find the perfect investors or figure how you’re going to appeal to the people you’re about to meet. All you need to do is find like-minded people to donate a little bit of money.”
It can also be a complicated process to navigate. Here are a few tips to presenting a business idea and following through the crowdfunding process.
Get early feedback
Prior to making a crowdfunding pitch, it is essential to seek the input of others. Jordan Kasteler describes “the planning before the planning,” in a story for Inc.com, including testing the product idea “with real people — even if it’s just a handful.” This kind of feedback can be an early indication of interest, or “save you from putting months into a campaign only to miss the mark with your key audience.” Among his tips:
- “Ask for feedback from people who are not friends or family. Explaining your product at networking events can help you gauge real interest.”
- “Present a problem and explain how your product solves it. Do people’s eyes light up?”
- “Note what type of people seem interested. Is it a certain demographic over and over? What made them interested?”
Know the goal
It’s a big question: How much money is needed? Since different crowdfunding sites have different requirements, determining that magic number is vital. Underestimating the amount may sell the idea short. Overestimating it may prevent a campaign from succeeding. Thomas Smale explores this in a story for Entrepreneur.
“… It’s important to think about how much money you need to get your business up and running, and how many people you know that would be willing to pledge. Although you may attract the attention of new people with your campaign, most of your support is going to come from those who already know you. Be realistic. Also, keep in mind that you can’t change your funding goal once you’ve initiated the campaign.”
Research the various platforms
Some crowdfunding sites generate more buzz than others. Kickstarter, for instance, was an early standout. But others may be better suited for various startups, and have different results if a financial target is not met. A prospective business owner should dive into a detailed analysis of the available options, as William Johnson writes for Smallbiztrends.com.
“The success of your campaign, to a great extent, depends on the crowdfunding platform you have picked,” he explains. “There are a dozen platforms and each has certain advantages and disadvantages. Since you can pick only one for your campaign, you need to do a lot of research to pick the right platform. Some of the most popular crowdfunding platforms include Kickstarter, IndieGoGo, Fundable, GoFundMe and AngelList.”
Prepare a concise explanation
If a prospective owner’s explanation of a startup turns into a winding road of hard-to-follow ideas and concepts, it won’t inspire much confidence. Just as a salesperson needs a rock-solid elevator pitch, so does the entrepreneur need a startup pitch. Benjamin Pimentel tackles this in a story for Nerd Wallet, with commentary from Jim Dowd of a Utah investment advisory firm. A business pitch should be able to be boiled down to one sentence, he says: “If the company’s founder can’t explain what they’re doing, chances are investors are going to lose interest.”
Having a clear explanation applies to describing the market opportunity as well, Dowd says in the story: “If things go swimmingly well and the company is a success, how big is the market the company is trying to address?”
Communicate the message
When a concept is up and available on a crowdfunding site, presentation is essential. It’s the best chance for the prospective owner to tell the story of the business idea, and why investing in it is worthwhile. Smale examines this in his Entrepreneur story, writing, “Let your potential funders know how your product or business idea can benefit them.”
“Share who you are, what you’re planning to do, where the project idea came from, what your budget is and why you’re passionate about it,” he says. “This shows that you’ve actually put some thought into the idea, which helps prove the legitimacy and credibility of your project.”
The visual elements can be a major component of this as well, he says: “Make sure to create a great looking project-header image as well as a compelling video. Video is particularly important, and can even make or break your project. Ensure that your video is high quality and professional. Most campaigns that do well on Kickstarter have great looking videos. Make it engaging and fun to watch, and don’t cut corners with the production.”
Make the rewards worth their while
There has to be incentive for people to give money in rewards-based crowdfunding. The prospective owner should ponder what kinds of products, discounts or recognition might make a strong connection, enough to inspire donations. A story by the Young Entrepreneur Council for Business Insider advises to “provide value for value.”
“Crowdfunding campaigns hinge on reciprocity,” the story states. “If your startup offers fantastic products, rewards or opportunities, you’ve created a huge incentive for backers to pledge to your campaign. When choosing your reward tiers, reflect on whether the incentives would appeal to you if you were the consumer; ask friends, family members and business acquaintances for their honest opinions as well.”
Take advantage of social media
Social networking in many ways is perfectly suited for crowdfunding. It’s a great way to get the message out, and an ideal way for peers, friends and family to share that message so that it grows to even more social circles. Kendall Almerico examines this for Entrepreneur, writing that it’s important to have a strong social media presence before the campaign begins: “A typical rewards-based crowdfunding campaign lasts only 30 to 60 days, so it is too late to try to build a following on social media during the campaign. Adding quality contacts on social media must start weeks, if not months, before the campaign launches.”
And communicating through social media can provide a boost as well, he says: “Social media works when people feel a connection. Simply posting something, then ignoring comments or interactions is a big mistake. … Interaction is the key to successful social media engagement. For the month or two of a crowdfunding campaign, success requires that daily time be set aside to utilize this incredible tool, not only to tell people what is going on, but to talk to your audience directly, and to respond to them as quickly and as thoroughly as possible.”