Guide: Is crowdfunding right for my small business?
So, you’re wondering if crowdfunding is right for your small business? This guide will give a high-level introduction to crowdfunding and highlight the 4 types of crowdfunding to help you understand which option — donation crowdfunding, reward crowdfunding, debt crowdfunding, or equity crowdfunding — makes the most sense for you and your business.
Crowdfunding 101
Crowdfunding refers to publicly raising money for a project through a number of relatively small contributions from many people. Depending on the type of business you run, the age of the business, and your clientele, crowdfunding can be a powerful way to not only raise money, but also to build awareness for your business, get market validation before executing a project, and build customer loyalty with individuals who back your project.
A crowdfunding project is typically referred to as a campaign, and generally includes a dedicated campaign page where potential backers can be directed to learn more about the project and make a contribution. Top-performing campaign pages include a video of the business owner explaining the business and the project, photos, a short history of the business, and details on the project for which you are raising money. Here is a link to one of our favorite campaign pages.
A crowdfunding platform is a website that hosts crowdfunding campaigns. Sometimes businesses will opt to host crowdfunding campaigns directly on their own website, but this can be challenging to set up and can reduce the credibility of your campaign while also preventing you from reaching the networks of backers that each crowdfunding platform has built.
Launching a Campaign
Each crowdfunding platform has unique criteria for which businesses can qualify to use their website. Depending on the platform these criteria could range from your social media following, the quality of your website and marketing materials, your ability to produce quality financial documents and a business plan, or your ability to create an attractive campaign page.
Running a Campaign
Running a crowdfunding campaign will differ across platforms, but you can expect to put in between 5–20 hours of work to create your campaign page and build a marketing plan before you launch. During the life of your campaign, which typically ranges from 30 to 90 days, you should expect to spend several hours each week to promote your campaign and engage with backers. Here is a guide to help you understand the work you’ll need to put in to run a successful crowdfunding campaign.
Keep-It-All vs. All-or-Nothing
Crowdfunding campaigns are either considered keep-it-all crowdfunding or all-or-nothing crowdfunding. Some platforms will exclusively run one type of crowdfunding, while others will offer you the option at the time of your onboarding.
Keep-it-all crowdfunding is when your business keeps the proceeds regardless of whether the minimum funding goal is reached, whereas all-or-nothing crowdfunding requires you to reach a predetermined crowdfunding goal before you can keep the funds you raised.
In an all-or-nothing crowdfunding campaign, funds will be returned to your backers if the goal is not reached. Keep-it-all crowdfunding is less risky but it can also create less urgency for backers and therefore typically reduces the amount of money that can be raised during a campaign.
The Crowdfunding Options for Small Businesses
There are 4 major types of crowdfunding — donation crowdfunding, reward crowdfunding, debt crowdfunding, and equity crowdfunding.
Donation Crowdfunding
Donation crowdfunding is when your business asks for donations to support a project, there are typically no rewards, perks, or returns expected from backers but rather they are making a contribution because they believe in the story or the project.
The largest donation crowdfunding site is GoFundMe which does not publish data on the success of their campaigns but donation crowdfunding campaigns typically have the smallest individual contributions, the smallest total campaign sizes, and the lowest success rates of businesses successfully reaching their funding goal.
Despite the low success rate and fundraising levels, there is a time and place for small businesses to use donation crowdfunding and many have found success. For example, if your small business suffered a setback such as flooding, a burglary, or a fire that will not be fully covered by insurance then donation crowdfunding could be a good place to turn.
Alternatively, if you are launching a charitable project through your business like donating prepared food or personal protective equipment to frontline workers during COVID, a donation crowdfunding campaign can be a great way to raise money for the project.
Reward Crowdfunding
Reward crowdfunding or gift crowdfunding for businesses is when your business pre-sells products to help fund startup costs to develop, manufacture, or fulfill product orders. Reward crowdfunding can also be used to offer perks such as company swag or access to events. When backers support your reward crowdfunding campaign they are expecting you to use the money toward your stated purpose and to fulfill their reward in a timely fashion.
Reward crowdfunding can be a great tool to test product-market fit before spending heavily to manufacture a product and store inventory. This typically works for very early-stage companies that have built buzz but are not yet in the market.
The largest reward crowdfunding websites are Kickstarter and Indiegogo. The types of products offered on these platforms can vary widely from a documentary film to a high-performance backpack to a video game. Non-product businesses often have a much more difficult time turning to reward crowdfunding, and remember even if you can run a successful reward crowdfunding with swag, fulfilling those orders can be time-consuming and distracting!
Campaign success rates for reward crowdfunding are typically higher for reward crowdfunding than donation crowdfunding as are the average size of contributions. Campaign sizes can be as small as a couple of thousand dollars to the headline-grabbing multimillion-dollar deals. Some of the great crowdfunding success stories such as the Pebble Time Kickstarter campaign that raised over $20 million are inspiring but can lead some business owners to set unrealistic expectations about how much they can raise through a crowdfunding campaign.
Debt Crowdfunding
Debt crowdfunding (sometimes called crowdfinancing or loan crowdfunding) is one of the youngest and fastest-growing categories of crowdfunding for small businesses. Only legal since 2016 in the United States, debt crowdfunding is when you borrow money from your own customers, fans, or community members through a crowdfunding campaign.
In many ways, a debt crowdfunding campaign can look like a traditional loan but instead of making payments to an anonymous bank or online lender, payments are distributed to your community backers, keeping the money in your local economy and encouraging your backers to support your business.
Backers in a debt crowdfunding campaign get to support their favorite businesses while also expecting an attractive return on their investment. This makes debt crowdfunding a powerful tool to build customer loyalty, by giving your customers an emotional and financial stake in the success of your business, without giving up any ownership stake.
Honeycomb Credit is the largest platform focused on debt crowdfunding. Businesses raising on their platform have an 80% success rate, typically raising anywhere from $10,000 to $100,000 or more with the average investment from backers around $1,000.
Historically, Main Street small businesses with a successful track record and a direct touchpoint with their customers have been most successful in using debt crowdfunding.
Equity Crowdfunding
Like debt crowdfunding, equity crowdfunding is also relatively new on the crowdfunding block and it involves selling a piece of your company to individual backers.
Equity crowdfunding can be valuable for high tech or high growth companies who may not have the cash flow to service a loan through debt crowdfunding, but who are looking to raise more money than a traditional reward crowdfunding campaign may be able to support.
Keep in mind that your backers will be part owners of your company and depending on how a deal is structured, may have voting rights on key decisions about your business.
The largest equity crowdfunding platforms are Wefunder, Republic, and StartEngine. Success rates and funding levels vary by platform and campaign, but Wefunder reports that more than 60% of equity crowdfunding on their platform is successful and the average amount raised is in excess of $300,000.
Keep your business strong with the community at your side. Raise up to $250,000 in crowdfunded capital and build buzz on Honeycomb Credit. Learn more at honeycombcredit.com.
