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Funding a Startup with Crowdfunding

Funding a Startup with Crowdfunding

Crowdfunding has become popular for startups looking to launch, and it’s no wonder. It’s (commonly) free money, which you do not need to repay. And you can get these funds without needing to surrender any ownership or control over your startup. Plus, it can help you to ascertain the appeal of an idea or a prototype or invention, since there is no sense in proceeding if there is no interest in your handiwork.

You will need to make a lot of choices before you even start a startup crowdfunding campaign.

How Much?

Your first decision should be: just 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 any money you can raise. For that reason, you will need to take that into consideration. Crowdfunding percent fees range from 4% to 10%.

Will I Succeed?

Another decision has to do with how successful you believe your campaign going to be. If you are extremely confident that you will be 100% funded by the end of your campaign, then traditional funding is for you. If you are not certain, then try Indiegogo and GoFundMe’s flexible funding. With flexible funding, you, the campaign runner, can retain your donations even if your campaign falls short. Having said that, for this privilege, you will have to pay a higher fee to Indiegogo or GoFundMe. Other crowdfunding platforms like Kickstarter don’t provide this option.

What Should I Provide for Perks?

You will need to provide perks to your donors. Perks can take several forms – buttons, tee shirts, book marks – every one of those are possible tangible perks. Consider a perk format which can dovetail with your startup. If you sell homemade jam, then perhaps develop 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 complimentary lesson or a postcard with a favorite horse’s image on it, or something like that. Does your business flip houses? Then consider providing a coupon to a local home supply company (work with them beforehand, naturally) or something like that.

Pro tip: Tangible perks are a pain! A lot of people love them, and they will attract attention. However, tangible perks also must be delivered. International shipping is very expensive, even for small items. So if you provide tangible perks, indicate whether you will allow international donor addresses. Even if everything has to be shipped in the US, you are still left with managing a data base of names and addresses (a portion of which might have typographical errors or be incomplete) and often a range of available perks. Did Jane want the stuffed teddy bear or the book mark? Did Alan want the pennant or the tee shirt? Do Jane and Alan live at the same address so perhaps their perks could be combined? What if a perk gets lost or is damaged in the mail?

As a result, if you can do it, try for online perks. For a house flipping startup, you could possibly record videos about home design or repair. For a bakery, you could provide downloads of recipes. And for a health club, maybe offer electronic coupons for a cost-free month of membership.

Your Campaign

Your campaign’s effectiveness is far from ensured. However, you can make the most of a few known techniques. First of all take into account these four emotions that you need to engender in donors. Use one or more of them as the main feature of your campaign as a starting point.

Urgency: The very first two and final two days of a crowdfunding campaign are nearly always the days with the biggest payoffs. Often, extending the campaign doesn’t make you a lot more money. So why not open a campaign for only a week? Don’t let donors assume they can chip in any old time they feel like it.

Scarcity: If you have thousands of something or other to provide as a perk, it won’t be as desirable. If you only have one or two of a certain perk, that will instill a sensation in some potential donors that they just have to have it. Do this with your larger donation levels only. As a result, you might wish to set up a perk/donation level system something like this:

Donation Level Number of Perks
Lowest 1,000
Second lowest 500 (reward also incorporates lowest level reward)
Second highest 50 (reward also includes two lower level rewards)
Highest 10 (reward also incorporates all other levels’ rewards)

Keep in mind, a great deal of variation in tangible perks will make fulfillment a lot more challenging, so do not work with greater than perhaps five different sorts of tangible perks – and even that is pushing it.

Novelty: If you are supplying the same thing as a thousand other sites, no one will wish to make a donation. Your widget should be lighter, hotter, less costly, or longer lasting. Your food should be reduced in calories or higher in nutritional value or better-tasting. Or your services ought to be supplied better or faster, by friendlier and more skilled employees, and with a money back guarantee your competitors do not provide.

Cool Factor: Is your product a form of art? Is it a new, gadget-like innovation? Then it could have a coolness aspect which you can set up your campaign around. But do not be discouraged if it’s not! These days, some of the most brilliant ad campaigns are based around an item most people found dull not even a decade ago – insurance.

Strategy

A few words on strategy:

  • Good manners will always, always matter. Say please, thank you, and you’re welcome to everyone! Use these magic words in your pitch and in your correspondence with your donors, even in the cover letters you send with your perks (even online perks can come with a cover email). You do not have to be servile, but you absolutely must be diplomatic.
  • Your stretch goals should be a combination of readily attainable and pie in the sky. If you are crowdfunding for $100,000, a rather easy to attain stretch goal is $125,000. Pie in the sky is going to be more like $300,000. Make it abundantly clear what you will do with any additional cash if you are fortunate enough to get it. Will you acquire the property your business operates in? Hire five additional people? Upgrade your outdated equipment? Launch a brand-new market on another continent? Let your donors know what you are striving for, so they can dream with you.
  • Don’t be greedy! If you really need $250,000 for your campaign, but you call for $1,000,000, that does not do anybody any good. You’ll just seem like you wish to mooch off others’ generosity. Instead, explain your expenditures as plainly and transparently as you can. And by the way, if you abuse your funds, you might find yourself in an unpleasant meeting with your state’s attorney general. So tell the whole truth about how much you really need.
  • Your pitch video has got be good. Use an expert to film it and compose the script. Unable to pay for specialists? Then try schools, both pupils and teachers. Your script does not have to be word for word but you should have points you wish to make and not rattle on. Create a script and adhere to it. This is not the right time to wing it and hope for the best.
  • If you have tangible evidence of your project, then be sure to present it in your campaign video and on your campaign page. This means a photo of your health spa’s sign or a short video recording of your prototype robot. Lots of people are understandably mistrustful about crowdfunding. A picture and a tangible thing will go a long way to ensuring them that your project isn’t vaporware.
  • Share your campaign on social media and ask your friends and family to do so, too. Tweet the link. Add it as a Facebook status. Make it a Tumblr post or a snap on Snapchat or publish a blog post about it. Ask your network to publish the link.

The most effective method to get your network to help you out is by helping them in return. If your relative’s band is on Facebook, share their page, or tweet about it. Be a collaborative member of your very own personal community, and your contacts will be more likely to help you out when you ask. And rerun these social media postings. Taking into consideration time zones and our all-too hectic lives, people may not see your message the very first time around. Mix it up and send it at irregular hours (you can usually use scheduling software like Hootsuite for this), including what is the middle of the night where you are.

  • Line up the most significant and most dependable donors you can before you start. Tell your mother or your brother in law or your former high school football coach to hold back on handing over their $1,000 or $10,000 donation until you launch your campaign. And ask them (nicely!) to release their money at a very specific time. Which time? The very first or last day of the campaign (split the anticipated funds as well as you are able; if the split isn’t around half and half, then ask for the bigger chunk of donations to come on the final day of the campaign). Take advantage of the novelty factor of the first day of the campaign, or the urgency factor of the very last. Like a busker with a couple of her own dollars in her hat, to invite people to toss a few bucks for a song, you want your biggest donors to show other donors that they have confidence in you and in your project. And you also want them to suggest your other donors that they had best get in on investing in your startup before the chance ends.
  • Be polite if your campaign fails. Even if you use GoFundMe’s flexible funding option, you nonetheless may not get enough to make a substantial dent in your funding requirements. If you wanted $100,000 and you only got $500, your best option is to just return the money. If you almost got there with $95,000, then say thanks to everybody who donated and see what you can do, despite the fact that there’s a deficiency. And let them know what you’re doing! Maybe you’ll buy your building next year, or employ four people as opposed to five. Once again, give your donors a stake in and an inside look at your startup. This will enable them to feel invested. And they might just opt to make up the shortfall themselves. Just because your crowdfunding campaign concludes doesn’t mean a donor can’t write a check or buy additional goods or services. If that happens, then politeness is crucial.

Finally, if your startup crowdfunding campaign is successful, think about donating a couple of dollars to others’ campaigns, or at least to charity. Because business goodwill and an excellent reputation are invaluable.



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by Janet Gershen-Siegel // Janet Gershen-Siegel, a published author, has an MS in Communications from Quinnipiac University, and a JD from Widener Law School. She has been admitted to practice law for over 30 years, with a focus on litigation. She regularly writes for Credit Suite, which helps businesses build credit for their EIN that’s not linked to their SSN, and get approved for loans and credit lines.

Opinions expressed by contributors are their own.