Banking & Finance and Small Business & Startups

Crowdfunding for small businesses

February 27, 2015
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For the past few years there has been a lot of excitement about crowdfunding opportunities for small businesses in Michigan.

Crowfunding, in its most basic definition, is the practice of funding a project or venture by receiving small amounts of money from a large group of people.

Initially used by emerging musicians and artists, crowdfunding officially entered the business realm in 2012, when President Barack Obama signed the JOBS Act. Part of the JOBS Act was the Entrepreneur Access to Capital Act, allowing the general public to participate in crowdfunding activities.

There are many different styles of crowdfunding that are used on various online crowdfunding platforms. Among the most popular tactics are good-cause crowdfunding, rewards-based crowdfunding, pre-order crowdfunding and debt-based crowdfunding. Most people are familiar with rewards-based crowdfunding, where funders are given various rewards or benefits based on their level of giving. Rewards-based crowdfunding is different from crowdfunding for equity, because backers do not legally have a stake in the company. Instead, they own a product (often a prototype or limited edition version), or receive some type of pre-determined benefit for their financial investment.

In an environment where receiving small business financing is increasingly competitive, crowdfunding offers an exciting alternative for startups and small businesses looking to launch. Do you think crowdfunding might be right for you? Consider these tips before launching your first crowdfunding campaign:

Determine what platform you want to use. Kickstarter, Indiegogo, Crowdrise, Quirky and Tilt are five of the most commonly used crowdfunding platforms. They each offer different benefits and are targeted for different types of businesses. For example, Kickstarter allows crowdfunding for creatives, including musicians, filmmakers, photographers, designers, developers, etc., but does not allow crowdfunding for equity or charitable fundraisers. It is also important to take a look at what you need to have prepared to launch your campaign, and what the platform’s fundraising fees are.

Create your funding goal. Take the time to put a lot of thought into your fundraising goal and determining how you will define success. Make sure your campaign is feasible, and remember to account for the “rewards” you will be providing backers, if it is a rewards-based campaign.

Have an informative and entertaining video. This video will be seen by anyone who is interested in your product. This is your chance to make a good first impression and show your value proposition. Make sure you spend time getting the video right — it will be worth it!

Don’t set it up and forget it. If you think you can create a campaign, then come back four weeks later and expect to have raised thousands of dollars, you’re wrong. Your fundraiser will not operate on its own. In fact, you should create an entire marketing strategy around the campaign. Getting past that initial “$0” raised can be difficult, so start by getting a list of committed supporters before the campaign has even started. This way, once it launches you’ll have some guaranteed funding up on the site, encouraging others to donate, too.

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