Crowdfunding can potentially be an effective way to raise capital and you can often double dip by marketing your business and getting your name out there. There are a few factors to note and hopefully help you decide if crowd funding is a route worth taking and if so which crowdfunding model will work best.
We'll discuss three models of crowdfunding in this article. While there are other models, these three will give you a good idea of what to start looking for as a fundraiser.
- Debt: Debt crowdfunding (also known as peer to peer lending) raises money from investors with intent to pay them back at a later date with interest. This can be a good strategy to raise funds for an established business's as well as startups. Your business has to be appealing to investors, putting together an attractive investor package that portrays your company's mission and personality will help you onboard investors. Many peer to peer crowdfunding platforms offer investors to start with small investments which is appealing to your potential investors. Maintaining a consistent relationship with your investors can lead to further investments from them. Publicizing a weekly or monthly update on how your business is doing and informing your investors on the goals and milestones you've reached can go a long way and lead to further funding on your campaign. All investors want to know how their investments are doing and that they are in good hands, nobody wants to feel like their money is left in the dark. There are a few online platforms out there to start a campaign, WeFunder for example, is an easy to navigate platform both for the fundraiser and investor. As a fundraiser, you will create a profile, there are a few different structures, a debt fundraiser is an option they support!
- Equity: Similar to crowdfunding debt, peer to peer lenders can invest in your business but with an equity model, they will gain a piece of your company. The downsize offering equity, obviously is that you give up a part of your business. However, many investors seek equity investments and this can be more appealing to them. Another potential advantage is that your investors may feel more a part of your company and actually help you promote. You can reach out to your investors and encourage them to help you promote! Make it easy for them, provide them with attractive material to post on their social media and send to their network. Again, they are now apart of your company and want to see it succeed! There are a few online platforms that specialize in equity crowdfunding, again WeFunder is a smooth platform and an equity investment structure is an format they support, you will set a minimum investment, provide compelling material and start promoting it!
- Donations: This will typically be a strategy for non-profits or an organization that is backing a social cause, this will not be an proper strategy for raising funds for typical business capital. However, if you want to gain publicity for your business and give back to your community, you can consider starting a program that pledges to use raised funds for assisting a cause. Keep in mind, you must be completely transparent with why you are fundraising and where the money will be going, and make sure that if you are marketing a cause, all the funds go where the donors intended. For example, a client of ours needed a creative way to publicize their construction company to their community, we encouraged them to start a program that offered home repair assistance to victims of a hurricane that hit their town the previous year. They completed a successful fundraiser that enabled them to help dozens of local families and also became a well known contractor in the community as a result. It truly was a win-win. Their intentions were pure and all the money raised went to help families. If this idea is something you would be interested in, you should consult with a CPA on how to handle donations for tax purposes.
Bottom line is, while crowd funding can be an effective strategy to raise capital, you must make it appealing to potential investors. This is not a bank loan where your credit score and business history / standing are prime factors. You are proposing your business to individual investors, often people flipping through profiles looking for a business, product or idea that they believe can make them a return. Good luck!