Crowdfunding for business: Everything you need to know
When it comes to growing your small business, obtaining funding is crucial.
Unfortunately, traditional business loans may be unavailable to small, growing businesses with limited financial records. Similarly, creditors tend to offer new companies lower lines of credit at exorbitant interest rates.
This is why so many Australian startup owners are turning to crowdfunding.
What is crowdfunding?
Crowdfunding is a type of business funding that involves soliciting small amounts from a large group of people. This is in contrast to traditional funding, which is usually obtained from a single entity in one large lump sum.
These small investments are then pooled together to reach a funding goal set by the company at the beginning of the campaign. Usually, initial investments aren't returned to investors — with investors instead receiving a predetermined reward of some kind.
The “crowd” of investors can consist of anyone, but typically includes:
Friends and family members
Current or potential customers
Interested individuals or entities
While the end goal is the same, obtaining funds via crowdfunding is a much different process than traditional financing methods.
How does crowdfunding work?
The crowdfunding process involves the following steps:
Create and publish crowdfunding campaign
Collect investments from the crowd
Depending on terms, deliver payment/reward to investors
Use funds generated for specific, predetermined business purpose
While crowdfunding can be self-managed, businesses usually enlist the help of dedicated third-party providers to get their campaigns up and running. Generally speaking, this is the best course of action for growing businesses with limited reach and resources.
Note that “crowdfunding” refers to singular initiatives — not open, ongoing requests for donations. Each crowdfunding campaign must have specific financial goals and other terms in place to be accepted on crowdfunding platforms.
Read on to learn more about how crowdfunding campaigns typically play out — and how you can make the most of the next initiative you put together.
Advantages of crowdfunding
Crowdfunding is a great funding option for small, growing businesses for several reasons:
No repayment obligation
Firstly, you usually aren’t required to pay back the amounts invested. Though you may choose to reward your investors in some way, these costs will pale in comparison to the amount of capital generated through the campaign. (You also typically won’t be giving out shares of your company to investors, either.)
Excellent credit isn’t necessary
Crowdfunding also allows you to obtain funding on the merit of your business — not on your credit history. As long as you can put together a compelling campaign, you essentially control your ability to get the funding you need.
Offers marketing opportunities
Crowdfunding comes with the added bonus of also being a marketing tool. Within your crowdfunding campaigns, you can:
Build a community of invested customers
Gather feedback from dedicated followers
Generate word-of-mouth recommendations from loyal participants
So, a successful crowdfunding campaign can net you the funding you need, and be directly responsible for an increase in sales moving forward.
Disadvantages of crowdfunding
Of course, crowdfunding isn’t perfect — it also has some drawbacks:
Difficult to manage
Management of crowdfunding campaigns and customer/investor relationships is a time-consuming process. And you may have associated expenses, such as creating marketing materials or outsourcing specific components of your campaign.
Funding is tied to a specific goal
There’s always a chance you won’t reach your funding goal, which may prevent you from obtaining any funding at all. This outcome would mean a waste of time and effort that could have been better used elsewhere.
Equally though, a considered, strategic approach to crowdfunding can help minimise the chances of not getting the results you’re looking for.
Types of crowdfunding
There are four “types” of crowdfunding Australian small business owners can choose:.
Examples of rewards-based crowdfunding platforms include Kickstarter, Indiegogo and Patreon. Reward-based crowdfunding involves companies providing non-cash compensation to investors once they reach certain funding goals.
The rewards may relate to the company’s products or services in some way. Some examples include:
Branded apparel and swag
Free/discounted product upgrades
Concierge services and VIP perks
Rewards may also be tiered, based on the amount invested to incentivise donations.
Controllable reward costs
Brandable rewards increase engagement and visibility
Rewards must be valuable enough to incentivise investments
Examples of equity crowdfunding platforms include Fundable, EquityNet and Localstake. Also known as crowd-sourced funding, equity-based crowdfunding involves investors buying shares of your company, each in relatively small amounts.
Owners can also dole out convertible notes, guaranteeing investors a certain amount of shares in the future. This equity gives investors partial ownership of the company — along with access to a percentage of the business profits over time.
Because it involves transfer of ownership, equity-based crowdfunding is subject to strict regulation and administrative oversight. Equally, these laws and regulations are constantly evolving to close legal loopholes and further enable smaller businesses to take advantage of the option.
Promise of future financial gains incentivises larger investments
Investors committed to helping your company succeed
Requires ongoing financial payouts to shareholders
Shareholders maintain partial ownership of company decisions
Debt-based (peer-to-peer) crowdfunding
Examples of debt-based crowdfunding platforms include LendingClub, Prosper and Upstart. Debt-based crowdfunding involves members of the crowd lending money to the company, which is to be repaid with interest over time. (This is perhaps the closest alternative to traditional bank loans, as far as crowdfunding goes.)
While P2P crowdfunding is regulated, lending is generally more borrower-friendly than traditional small business loans.
Access to lower interest rates and more manageable terms
Interest payouts incentivise larger investments
Borrower legally bound to terms of repayment
Examples of donation-based crowdfunding platforms include GoFundMe, Fundly and Snowball. Donation-based crowdfunding simply involves crowd members donating small amounts of cash toward a specific initiative.
While donation-based crowdfunding is often used for charitable causes, it can also raise funds for special interest projects. Essentially, donation-based crowdfunding campaigns work similarly to rewards-based campaigns — and can even involve some small incentive for investors. Overall, though, it’s about financially enabling the team to accomplish their goals.
No obligation to repay investors
Create community-building initiatives
Provide intrinsic rewards to investors
Campaign and initiative must be highly compelling
How to crowdfund successfully
As we’ve touched on, your efforts play a major role in the outcome of your business' crowdfunding campaigns. Now we’ll share some crowdfunding tips to help you get started with your campaign.
1. Set your goals
There are several goals to set before you launch your campaign.
First, you need to set a funding goal — and define exactly what you’ll do with the funding once you reach this goal. You may also want to list additional goals to strive for should you reach your initial funding amount.
From there, you’ll set two timelines: one for your crowdfunding campaign, and one for completion of your project after reaching your funding goal.
Note that setting these goals is important not just for internal planning, but also to set investor and customer expectations from the start — and to keep them engaged throughout the campaign and beyond.
2. Check on legal responsibilities
Certain types of business crowdfunding come with strict compliance regulations.
For example, Australian businesses using equity crowdsourcing must appoint at least two campaign directors and report regularly to the Australian Securities & Investments Commission. Additionally, their investors must follow certain guidelines, such as keeping investments under a specific dollar amount.
Before entering into an agreement with a third-party provider, be sure you know what the law requires — so you stay compliant throughout the campaign.
3. Choose a platform and apply
Most crowdfunding platforms have a relatively straightforward application process that involves registering your company name, location and other basic information within the system.
This process also helps identify those ineligible to participate on the platform straightaway. For example, some platforms may not yet cater to companies in certain countries — or may legally be unable to do so. Similarly, some providers may only cater to companies looking to solicit large amounts from investors.
4. Craft a compelling pitch
A comprehensive, strategic crowdfunding pitch should:
Define the purpose of the project or initiative and explain why you’ve opted to crowdfund
Explain the value your project will offer for your investors, your customers and the local community
Lay out a plan for funding and project development, along with any contingency plans for both positive and negative outcomes
Define rewards and related terms and conditions
Present a convincing request and call-to-action
5. Promote your campaign
Even the most effective crowdfunding campaigns will fail if not promoted and distributed properly. To this end, you’ll want to continually promote your campaigns on all of your owned channels, while also trying to obtain as much earned publicity as possible.
Some examples of how to promote your crowdfunding campaigns:
Scheduled social media posts
Static website banners
Press releases and announcements
6. Finalise the campaign
How this “wrap-up” stage plays out depends on how your campaign goes.
In any case, it’s important that you use what you’ve learned throughout the campaign as you work towards completion of your project. From basic customer data to engagement history and concrete feedback, you should have enough to create exactly what your audience expects from you.
7. Thank your supporters
Always remember that your investors and customers are the drivers of your crowdfunding campaigns, and you should thank them.
On top of campaign-specific rewards, keep them closely informed of your progress, and of general goings-on within your company.
Do I need to be a registered business to crowdfund?
All business-related crowdfunding efforts require the fundraiser to have an Australian Business Number.
Is crowdfunded money a donation?
For rewards-based campaigns, any gifts given can be considered tax deductions.
Do you pay back crowdfunding?
Debt-based crowdfunding is the only method in which you are usually responsible for paying back the money collected during a campaign.
However, after crowdfunding via equity-based methods, you’ll be responsible for paying out future dividends to shareholders.
What happens if you don’t reach your goal?
This depends entirely on the platform’s policies — which are subject to change at any time.
In some cases, you can keep the amount raised thus far. In others, it’s returned to investors. Some platforms might allow you to extend your campaign to meet your goal.
Simplify your business operations with MYOB
Approached strategically, crowdfunding can get small businesses the funding they need to grow — while also rallying their brand’s audience around their upcoming business ventures.
No matter where your funding is coming from though, keeping track of company finances is vital. Without a solid understanding of how much cash you have coming in — and how much you owe others — you simply won’t be able to plan for the future.
Want to learn more? Try MYOB free for 30 days.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.