Crowdfunding for business – what you need to know
Raising capital when banks and investors won’t play
If you’re starting a business or ready for big growth, it can be difficult to get the capital you need to scale. Banks are often reluctant to offer the loans you need, and it’s rare to find an investor who’ll back a smaller or very new endeavour.
Until recently, business owners had only one option – fund their growth themselves. That meant going cap-in-hand to family or putting the family home on the line. But crowdfunding offers businesses an alternative.
In many cases, it can be a great option. According to Statista, even with a global pandemic raging, 2020 saw the launch of 6.5 thousand crowdfunding campaigns. The transaction value was down by 13.2% but still managed to bring in 41 million AUD. That fall is expected to be a blip, with transaction value likely to rebound 6.3% to 43 million AUD in 2021.
What is crowdfunding (aka equity funding)?
Crowdfunding lets anyone raise capital on purpose-built platforms from a large group of investors, all making relatively tiny contributions. These are generally ordinary people – not career investors – and can contribute amounts as small as five or ten dollars to the scheme.
Some crowdfunding campaigns offer something in return for that investment:
- Rewards – in exchange for their contribution, investors can expect a gift, experience or other rewards in return. One example might be, for an investment of $100 towards a new start-up, you get tickets to the launch party or priority access to the earliest releases of a new product.
- Equity – investors put in money in exchange for a small stake in the growing company.
- Interest – crowdfunding can also be in the form of a loan where the investment is repaid, plus interest.
What are the pros and cons of crowdfunding for business?
Compared to other sources of funding, crowdfunding has a few benefits:
- It doubles as marketing – by getting people on board at the crowdfunding stage, you launch or scale with an already engaged customer base.
- You get feedback – most platforms allow for some interaction between you and your investors, which means your customers can give you feedback.
- You stay in control – with traditional lending or investment, you’ll have to stick to traditional systems, paying interest or handing over parts of your business. Crowdfunding offers more flexibility – you get to decide what you’re happy to give in return for the investment.
- It’s lower risk – most platforms only allow you to take the funding if you reach a certain goal. This means you’re not committed to delivering unless you have your full investment. You’re also not risking your own wealth.
Crowdfunding does have some downsides:
- You may not get the funding you need – most platforms ask you to set a funding goal and a timeframe. If you don’t reach that goal within the time, you get nothing.
- It can be resource-intensive – it’s a crowded market, so you may need to invest in slick marketing materials and set aside time to interact with your backers to keep them updated.
- You’ll need to be sure you can deliver – whether you promised lots of rewards, a stake in the company or one of the first products off the ship, you’ll need to be sure you can keep that promise.
If crowdfunding sounds like the right way to go, the next step is to choose the right platform. Each one comes with slightly different functionality, so it’s wise to spend time working out which will suit you.
What are the best crowdfunding platforms for business?
International players will come with trustworthy history, while Australian-based platforms will have that all-important local knowledge. Each platform will let you pitch your idea, and then manage the investments you receive. All will take a commission, though when and how much will vary. Here are the most common:
International crowdfunding platforms
Australian crowdfunding platforms
What makes a successful crowdfunding campaign?
A successful crowdfunding push should have all the same elements as a marketing campaign – good strategy, storytelling, incentive, reach and audience engagement.
Use strategy – think about what you’re trying to achieve and what will resonate with people. This will guide the audience you target, the platform you choose, the timeframe and goal you’re going for, how you pitch your idea and what incentive you offer.
Decide on your incentive – think about what will motivate your audience. Will they be most excited by a stake in the company, exclusive first access to your product or a quirky reward?
Create your story – it’s worth creating marketing materials like copy, video and design. Think about how to frame your pitch so it’s most compelling.
Reach your audience – once you’ve launched your campaign, you’ll need to get the word out. Engage your social networks, spend on social advertising and investigate PR opportunities.
Engage with your backers – be prepared to make time to connect with your backers through the entire process. This builds trust and helps your message reach further. You’ll also often get useful feedback that could help strengthen your business idea, product or launch marketing strategy.
What ideas and businesses do well with crowdfunding?
The crowdfunding campaigns that go ‘viral’ are ones that either have an amazing business case, play on the heartstrings or have a share-worthy incentive or idea. For example, the Oculus, a virtual reality headset, was developed using funds from Kickstarter. They wanted $250,000 but eventually raised $2.4 million. The founders sold the company to Facebook in 2014 for $2 billion in 2014.
Do I need to worry about legal or tax issues?
In Australia, depending on your business idea, and what kind of crowdfunding you choose, you may need to register for licenses and meet other legal terms and conditions. If you’re offering a stake in your company it’s especially important to seek legal advice. And whatever you do, have a chat to an accountant first – you may need to pay tax on the money you receive.
Need funding for your business? Ask a crowd
Banks and traditional investors might not be a good option for your business, but if you know your idea is a great one or your business is ready to take off, it might be time to try crowdfunding. Before you get started decide on your strategy and investor incentive, create your story, reach out to your audience and, once you launch, keep in close contact with your backers.
Be sure and give your lawyer and accountant a heads-up too, in case there are any legal or tax requirements involved. Once you get the green light, go for it!