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Published By Janet Gershen-Siegel at September 18th, 2017
If you have ever wondered how to fund your business with crowdfunding, then this one is for you! But before you commit to numbers, perks, a pitch, or anything of the sort, be sure to read this first. And, in particular, be sure to read this if that last sentence made no sense to you. Seriously.
Crowdfunding has become all the rage and there is no wonder. It is (usually) free money which you do not have to pay back. And you can get these funds without having to give up any ownership or control over your small business.
Plus it can help you to gauge the popularity of an idea or a prototype or invention. Because there is no sense in continuing if there is no interest in your handiwork.
Before delving into how to do it, let’s first look at when and how crowdfunding came to be.
In a way, crowdfunding is the child of angel investing. But what is an angel investor?
According to Investopedia: “Angel investors invest in small startups or entrepreneurs. Often, angel investors are among an entrepreneur’s family and friends. The capital angel investors provide may be a one-time investment to help the business propel or an ongoing injection of money to support and carry the company through its difficult early stages.”
The term comes from Broadway theater. Angels were originally the investors who backed plays, and they still do so. Those people are also called patrons of the arts.
The Statue of Liberty was essentially a crowdfunded endeavor. And that was in 1885. But it goes back more than that, as war bonds are a species of crowdfunding. Plus in the 1730s, the London mercantile community saved the Bank of England by supporting the currency. This averted a confidence disaster.
Heck, even the bank scenes in It’s a Wonderful Life show a form of nascent crowdfunding, because the citizens of the town forego full payments to help each other out.
And then we get to crowdfunding on the internet. Kickstarter, for example, was started in 2009. And ArtistShare goes back to 2003. Today, there are several crowdfunding platforms. They handle everything from inventions to artistic endeavors to medical bills.
So let’s get started. But you will have to make a lot of choices before you even start a business crowdfunding campaign.
Your first decision should be: how much do I need to crowdfund? If you need $1 million, you are going to have to crowdfund more than that.
Why? Because that is how crowdfunding platforms make their money. They take a percentage of whatever money you can raise. Therefore, you will need to take that into consideration. Crowdfunding percentage charges range from 4% to 10%.
Another decision is about how successful you believe your campaign is going to be. If you are super confident that you will be 100% funded at the end of your campaign, then traditional funding will be for you.
But if you are not sure, then try something like GoFundMe’s flexible funding. With flexible funding, you, the campaign runner, can keep your donations even if your campaign fails. But for this privilege, you will have to pay a higher fee to GoFundMe.
Other crowdfunding platforms like Kickstarter do not offer this option.
Think about a perk format which can dovetail with your business. If you sell homemade jam, then maybe create a special flavor just for the campaign. And offer bigger and bigger-sized jars depending on donation amount. If you are a horseback riding stable, offer a free lesson or a postcard with a favorite horse’s picture on it, or the like. Does your business flip houses? Then consider offering a coupon to a local home supply company or the like. But do work with them beforehand, of course.
Pro tip: physical perks are a pain! A lot of people love them, and they will attract attention. But physical perks also need to be shipped. International shipping is extremely expensive, even for small items. So if you offer physical perks, specify if you will allow international donor addresses.
And even if everything has to be shipped in America, you are still left with dealing with a database of names and addresses. And some of which might have typos or be incomplete.
Plus you often have to deal with a variety of available perks. Did Jane want the stuffed teddy bear or the bookmark? Did Alan want the pennant or the tee shirt? Do Jane and Alan live at the same address so maybe you can combine their perks?
What happens if a perk is lost or damaged in the mail?
Therefore, if you can do it, try for virtual perks. For a house flipping company, you might record videos about home decorating or repairs. Or for a bakery, you could offer downloads of recipes. And for a health club, maybe offer electronic coupons for a free month of membership.
There is absolutely nothing wrong with just going ahead and asking your potential donors about what they might like for perks. They might surprise you. Of course, the final decision will be your own.
But this is an excellent means of investing your donors and potential donors in the process. This is far more vital than you may think. That is because, when the donors are invested in your process, they will be invested in you. And they will want very badly for you to succeed. This will stand you in good stead if you have delays. And it will also help you out, big time, when your company is up and running.
Furthermore, if you ever crowdfund again, treating your donors right and giving them a seat at the table will assure that they just might follow you to your next campaign.
Your campaign’s success will be far from guaranteed. But you can take advantage of a few known strategies. First of all consider these four feelings that you want to engender in donors. Use one or more of them as the centerpiece of your campaign as a starting point. We will start with two today and the other two in the next post.
The first two and last two days of a crowdfunding campaign are nearly always the days with the biggest payoffs. Often, dragging out the campaign does not make you significantly more money.
So why not open a campaign for just a week? Do not let donors think they can contribute any old time they feel like it. If you give them the feeling that they had better act now, or else lose out, you will get more people to donate.
The fear of missing out is a very real thing.
If you have thousands of something or other to offer as a perk, it will not be as desirable to your donors. But if you only have one or two of a particular perk, that will create a feeling in some people that they just have to have it. Scarcity can create a bit of anxiety in your donors. And you do want that.
So do this with your higher donation levels only. Therefore, you might want to set up a perk/donation level scheme which looks something like this:
|Donation Level||Number of Perks|
|Second lowest||500 (this reward also includes the lowest level reward)|
|Middle||100 (this reward also includes the two lower level rewards)|
|Second highest||50 (this reward also includes the three lower level rewards)|
|Highest||10 (this reward also includes all of the other level rewards)|
But be sure to remember: a lot of variation in physical perks will make fulfillment a lot harder. So do not work with more than maybe five separate types of physical perks. And even that is pushing it. After all, look at the complexity already inherent in five tiers (see the table, above).
Multiply that by all of the donors you get to your campaign. Larger platforms offer software for fulfillment purposes. It will nearly always be best to work with it.
But if you have to do it all yourself, then seriously consider no more than three tiers. Trust me. You will thank me later.
In part 2, I will reveal the other two of the four feelings you are going to want your donors to have.