Whether raising money through equity crowdfunding or rewards-based crowdfunding, follow these three rules for crowdfunding your small business.
Crowdfunding has emerged as a revolutionary new way for entrepreneurs to raise money for their projects. No longer do you need high profile connections or a wealthy network of friends and family. Crowdfunding for business and entrepreneurship reached $6.7 billion last year for more than 40% of total crowdfunding volume, according to the 2015 Massolution Crowdfunding report.
But higher crowdfunding volume doesn’t necessarily mean a crowd waiting to back your campaign. More than a third of Kickstarter projects fail to reach their funding goal and the process for equity crowdfunding can be intense.
Fortunately for would-be entrepreneurs, three rules can help you get your crowdfunding campaign off to a solid start and well on your way to successfully reaching your goal.
Crowdfunding Rule #1: Expand Your Audience
In business, knowing your most likely buyer and targeting your advertising spend is the rule for an effective marketing strategy. The days of mass marketing through direct mailers have been replaced by niche micro-marketing through segmentation. You reach fewer people but you reach the people that matter.
While it’s not effective to spam out your crowdfunding campaign, the rule in crowdfunding is to cast a wider net. This is especially true in equity crowdfunding where investors not only have a social incentive to back campaigns but an economic return as well.
- Expanding your audience starts with understanding the different needs your product or service fulfills. Each of these needs represents a different marketing message for the campaign and potentially a different audience. Spend a little time thinking about the different audience segments and how you can reach each most effectively.
- For equity crowdfunding, reach out to investors and your product audience through different channels. An audience more interested in your product and the social impact can be reached through related forums and social groups while investors can be reached through investing sites, family offices and institutional firms.
- For rewards-based crowdfunding, include a social component to attract cause-driven backers. All Crumbs Artisan Bakery in Ohio raised more than $6,000 for a new retail location by building into the campaign donations of bread to the local Food for Thought pantry. The social promise brought additional media exposure and a new audience.
Crowdfunding Rule #2: Staged Financing
This second rule is better developed within the equity crowdfunding market but still not fully understood. Entrepreneurs often look at crowdfunding as a one-time opportunity to raise as much as possible. In fact, crowdfunding works best when it’s used in with the traditional model of business financing.
- Entrepreneurs first pitch seed financing to develop the idea or a minimum viable product. Within equity financing, this means making a strong case for market demand and return on the eventual product concept. Within rewards-based crowdfunding, seed financing means raising enough money to develop a product with basic functionality.
- Consider launching a small rewards-based campaign to raise money to develop your product and a market. A successful campaign can then be used to leverage an equity crowdfunding campaign where investors are sought to reach a workable business model.
- After seed financing, campaigns can be launched to raise money for full-scale production or more functionality in the product.
Separating your capital raise into separate crowdfunding campaigns avoids unrealistic funding goals for an undeveloped product or concept. Each successive campaign offers a new group of supporters to pitch for follow-on rounds.
Mine Shaft Brewing, a start-up brewer in Utah, is a good example of staged financing in equity crowdfunding. The founders raised funds from friends and family for development before launching their crowdfunding campaign. The brewer raised $665,000 in its seed round on EquityNet and now has $2.66 million in commitments to its $9.4 million Series A round.
I talked to CEO Tim Nemeckay for a post on the Crowd101 blog in March about his experience with equity crowdfunding. Tim likened the staged financing idea in crowdfunding with heading out on a roadtrip and notes that it’s better, “to start the engine with a little gas instead of going in bone dry and hope to get gas money.”
Crowdfunding Rule #3: Crowdfunding Isn’t Just About The Money
One of the biggest benefits to crowdfunding is a big surprise to a lot of campaigns. The marketing exposure you get from crowdfunding can ultimately be worth more than the money raised. I have talked to campaign owners that were unsuccessful reaching their funding goal but were able to connect to distributors and untapped markets through their crowdfunding campaign.
Beyond the sheer number of people reached through the crowd, crowdfunding backers feel a level of buy-in with the campaigns they support because they feel like they helped make the business possible. Business owners can leverage this support and sense of community well after the campaign is finished. More than the money, crowdfunding is about building a crowd around your brand.
- Engage backers and investors in business development to build a level of buy-in with the company.
- Survey your community on skills and abilities outside of monetary support. Even equity crowdfunding campaigns can find valuable members of the in-house team through their investors.
- Encourage your community and make it easy for them to share your campaign through their social network.
The process for successful crowdfunding can be detailed, especially the development of marketing material and analysis for equity crowdfunding, but these three rules will get you started building an effective campaign. Consider reaching out to a wider audience than you normally would and strategically plan your financing needs. Understand that the benefits to crowdfunding go beyond funding and leverage your community for small business success.
Joseph Hogue is the founder of Crowd101, a crowdfunding blog for investors and crowdfunding campaigns. He combines his experience in investment analysis with years spent coaching crowdfunding campaigns for a unique view from both sides of the table.
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