Should Your Startup Launch a Crowdfunding Campaign?
Launching a startup requires money, which in many cases founders don’t have. So one of the first tasks for startups owners is to raise enough money for their projects. Luckily today there are many ways to raise financial resources such as getting a bank loan or getting a project funded by friends, colleagues, or investors.
But what will you do when you can’t attract investors to fund your business? What will you do if you can’t even reach out to them to pitch your startup idea? Well, unless you have pockets full of cash, you don’t have many options left. That’s where crowdfunding comes in.
Let’s delve into how crowdfunding works, what its types are, and how to get started with a crowdfunding campaign.
How crowdfunding works
To understand how crowdfunding works, imagine your project needs one million dollars to grow. You could think about taking a loan from a bank or looking for people who will be ready to support your idea financially. But what if instead there were 200, 000 people who will be able to give you five dollars? Or 500, 000 people who will support your project with just two dollars? Imagine you could ask those people to give you feedback about what they think about your project. This is how crowdfunding works.
The best part about crowdfunding is that companies take money in exchange for booking the company’s product or service. This means that people get their products as soon as the company completes production. If the company doesn’t launch the product or service onto the market, it will return all the money that was attracted to all fund-raisers through an automated system. All crowdfunding platforms including Kickstarter, Indiegogo, and Patreon offer this trusted system to their users.
Types of Crowdfunding for Startups
There are different kinds of crowdfunding and this is one of the basic things you need to define for your campaign. Here are the types:
Reward-based crowdfunding. This is the most common type of crowdfunding. It lets backers contribute to a project in return for non-financial benefits such as goods, tickets to events, gifts, etc. Reward-based crowdfunding is commonly used for creative projects where the backers receive a token of reward for funding the project. The more a backer donates, the greater the reward. KickStarter, Indiegogo, Patreon, or Publishizer operate on this business model.
Equity-based crowdfunding. This model is used by companies that are growth-focused and aim to get a return on the invested amount. In this type of crowdfunding, backers will invest money in exchange for shares in your project. Republic, Companisto, SeedInvest, Crowdcube, Seedrs, or FunderBeam operate on this business model.
Donation-based crowdfunding. This kind of crowdfunding is designed for charities or other social-oriented projects. It is often used to fund medical treatments or education programs. GoFundMe, JustGiving, or DonorsChoose are famous for this business model.
What you can get from a crowdfunding campaign
- Raise money for your startup
- Reduce financial risk and generate revenue for your business
- Selling your products in advance
- Increase a company’s brand awareness and get exposure.
- Build your community
- Get feedback from target audience to improve your product
- Opportunities for collaboration and new partners.
The pitfalls of a crowdfunding campaign
- The creation of a crowdfunding campaign can be time- and money-consuming
- If you don’t reach your campaign’s target, you will have to return all invested money
- A failed campaign may damage your startup’s reputation
- If your project is not protected by a patent or a copyright, your idea can be stolen by anyone
8 questions to ask before crowdfunding
Before you decide to launch a crowdfunding campaign, you need to ask yourself a set of questions that will indicate if crowdfunding is a good fit to raise money for your startup business.
- Does your idea solve a particular problem for a specific audience?
- What is your unique selling point or unique value proposition?
- Are users of similar products satisfied with their current solution? Or do they need a better solution?
- Do you have a minimum viable product (MVP)?
- Have you calculated how much money you need? Have you taken into account all costs related to the campaign like taxes, fees to the crowdfunding services, costs of rewards fulfillment?
- Are you completely certain that you are able to fulfill the promises covered in your pitch including quality, timeframes, rewards?
- What are your marketing strategies for the different stages of the crowdfunding – before, during, and after the campaign?
- Do you have at least a couple of your personal contacts like friends, colleagues, family members, friends of your friends who support your idea and will back the campaign to give it an initial push?
What to get started with?
There are two things you should master if you’d like to see your crowdfunding campaign succeed — campaign creation and campaign promotion.
First, you should acknowledge that the goal of your campaign is to provide as much information about your idea and business as necessary to make potential investors excited. This could be through sharing your business story, videos, and articles, team background and revealing enticing business details. The transparency of your campaign and honesty with the audience is key. This helps people believe your product is something real, valuable, and actually created, not just some vague concept or prototype. At the end of the day, your investors deserve to know your company story, values, mission, and how you plan to grow your business.
Campaign promotion comes second. Crowdfunding is all about community and the power of the ‘crowd’. So if you have current customers, users, followers, invite them all to invest. Share your campaign with friends, network with peers and strangers. Leverage paid advertising. So, use as many channels to spread the word as you can to reach out more people (read — potential investors).
Crowdfunding takes a lot of effort, but the return is definitely worth the investment. One of the greatest things about crowdfunding is creating brand ambassadors and building a community of like-minded people.
5 steps to launch your campaign
Step 1: Do market research and find your target audience
Conduct market research and learn more about your target audience to understand the needs of your potential customers and demand for your product. This will make it easier to reach out to them and get their support.
Step 2: Choose the type of crowdfunding campaign and platform
Depending on the type of your campaign (reward-based, equity-based, or donation-based), choose a platform where you can launch your campaign, manage it, share your videos, articles, reviews, and all the necessary information about your project. These platforms usually take up to 10-15% fees depending on the provided services.
Step 3: Prepare a video pitch
The best way to present your idea or product is to create and demonstrate informative video about your project. According to Kickstarter, projects with videos were funded at a rate of 50%, compared with the 30% rate of the projects which didn’t have one. Keep the video short, down to 2 minutes to keep the audience engaged. Get their attention right at the beginning and use relevant visuals.
Animated explainer videos can also be very effective for presenting your product or idea.
Step 4: Create a landing page to build your email list
A landing page is crucial to collect emails of people who are interested in your idea or product. For this purpose, you need to have a basic landing page with all the project information, value proposition, and of course email collection field. Having a list of emails will make it easier for you to contact them and keep them updated.
Step 5: Build your presence on social media
Create your company’s profiles on different social channels and share engaging content with your audience. Plan your strategy in advance, as it takes time and effort to build an active user base and to keep it engaged.
No matter at what stage your startup is, investments can help you boost growth and keep you on track. Crowdfunding can be a great solution for these purposes. However, crowdfunding cannot be there to sustain your business in the long term, as you can’t leverage it again and again for the same idea or product. Once you have the funds, make everything possible to deliver what you have promised to the audience.
My author’s bio: Anna Grechko is a marketing enthusiast and knows the field inside out. She is the marketing specialist at Smart IT. Sharing knowledge is a big part of her career, so Anna doesn’t miss any opportunity to do so.