High-profile success of fundraising campaigns on “crowdfunding” platforms like Kickstarter, Indiegogo, and GoFundMe has swayed an increasing number of startup and small-business owners to try their hand at raising money through these sites. But crowdfunding isn’t right for every business. Let’s examine how crowdfunding sites work and what small businesses should know before launching a crowdfunding campaign.
How It Works
A business can set up a fundraising campaign on a crowdfunding site for any reason, such as to expand its operations, launch a new product, or build a new facility. Sites typically require that the business set a fundraising goal that must be met within a certain time period. Anyone can then go to the business' crowdfunding page and donate money toward the goal. If the campaign reaches its goal within the designated time frame, the site collects the donations for the business from all the people who pledged money.
The sites also take a small cut of the earnings. Kickstarter, for example, charges 5 percent of total funds raised for all successfully funded projects, along with a 3–5 percent payment processing fee on all pledges. It collects no fees if the project doesn't meet its goals. GoFundMe also takes a 5 percent cut of all raised funds and collects an extra 2.9 percent processing fee.
Currently, crowdfunding sites only allow businesses to take cash donations from their backers, often in exchange for gifts (like free merchandise) if the campaign is successfully funded. The Securities and Exchange Commission, however, is expected to establish rules in coming months that would allow businesses to offer equity to backers through crowdfunding platforms — a provision made possible through the U.S. Jumpstart Our Business Startups Act (JOBS Act) passed by Congress in 2012.
3 Strategies for Successful Campaigns
- Many businesses that are successful at crowdfunding often create social media campaigns and videos to get the word out about the campaign and to drive momentum. Garnering attention from local or national press can help generate excitement from donors. A PR best practice is including a media page on your campaign site, directing journalists to learn more about your project.
- People willing to invest in a crowdfunding venture want to be excited about a new project, so take time to put together a persuasive story about your idea. To do this, add to your campaign page photos, videos, and descriptions about what you plan to use the money for.
- It’s also a good idea to target potential donors rather than blanket your request for funds to as many email addresses as possible; to do this successfully, organize your social networks into subgroups and tailor the fundraising request message separately for each group.
Using a Crowdfunding Campaign as a Marketing Tool
In addition to the primary goal of raising capital, creating a crowdfunding campaign can be a great way to engage customers and create momentum for a project. Businesses that are able to maximize the marketing benefits of launching a crowdfunding campaign tend to fair well.
FUZ Designs managed to raise $652,000 on Kickstarter to build a padlock that can be opened and closed via a nearby Bluetooth device. Beyond the attention generated for the product by tech bloggers and news outlets, founders Cameron Gibb and David Gengler also received offers from people looking to help manufacture, design, and distribute the product.
"We always thought of the marketing and the money, but we didn't realize how it would open the door to other opportunities," Gibbs recently told Fortune.
Is Crowdfunding Right for Your Business?
Not every business is a good candidate for crowdfunding — and many businesses that attempt to raise money through crowdfunding sites aren't successful. According to Kickstarter, for example, only 38 percent of launched projects on the site are successful at reaching their fundraising goal. Before you begin a crowdfunding campaign, honestly evaluate its chance of success. Ask yourself:
- How much time and resources can I commit to the campaign?
- How have campaigns of companies with similar products fared?
- What’s a realistic fundraising goal? Is my time best spent working for on a campaign that, if successful, would yield this amount?
It’s okay if, when answering these questions, you realize that crowdfunding isn’t the best fundraising strategy for your business. There are many other ways for companies to raise capital. Turning to other methods, such as bank loans or equity investors, may even offer benefits that crowdfunding doesn’t, such as the potential for making business connections and accessing valuable expertise.