Are you looking for money in all the wrong places? Banks, angel investors and venture capitalists don’t seem too willing to put their faith in eager entrepreneurs these days.
But lo and behold, there’s a new kind of funding that’s getting a lot of buzz.
Crowdfunding is emerging as a powerful way to raise money to start or grow your business.
In 2011 alone, crowdfunding campaigns raised nearly $1.5 billion worldwide. And the industry is expected to experience explosive growth in the United States soon, thanks to the JOBS Act.
What Is Crowdfunding?
Crowdfunding, put simply, means you are raising money by persuading “the crowd” to contribute to your project or business idea. In this sense, cash-strapped entrepreneurs have been using crowdfunding for a long time.
For example, it’s fairly common for a business owner to seek small loans from friends and family to help pay start-up costs.
The amazing growth of the Internet and social networks, like Facebook and Twitter, has created an exciting new kind of online crowdfunding campaign.
And it is poised to revolutionize the way small businesses get money to get their ideas off the ground.
Let’s take a quick look at four common crowdfunding models:
Perks-based model rewards the people who contribute to your campaign with perks or rewards, such as a chance to tour your facility and meet your executive team.
Donation-based model allows contributors to donate to a specific cause or project because they believe in it and want to support it.
Debt-based model allows entrepreneurs to borrow money for their business or project, and then pay back contributors after a certain amount of time.
It’s similar to a bank loan, except you’re borrowing small amounts of money from various individuals in hopes of reaching your overall funding goal, rather than seeking a large sum of money from a single financial institution.
Equity-based model allows investors to become shareholders in your company when they contribute money to your crowdfunding campaign. Equity-based campaigns aren’t allowed in the United States yet.
The Securities and Exchange Commission is expected to release guidelines that will make these campaigns legal in 2013.
How to Run an Effective Campaign
If you run an effective crowdfunding campaign, the sky’s the limit. Take the Internet-enabled Pebble watch, for instance. The manufacturer posted its campaign on Kickstarter.com, hoping it could raise $100,000.
To the amazement of everyone involved, it blasted past its goal on the way to racking up an eye-opening $10 million.
So, what makes an effective campaign? Rockethub, a leading perks-based crowdfunding platform, outlined three essential pillars for a compelling campaign during the Crowdfunding Made Simple Conference in Salt Lake City.
1. Project. The emotional appeal of your project or business determines whether people will invest or donate. “Just because somebody is starting a company or launching a band project, doesn’t mean you’ll find success,” says Rockethub CEO Brian Meece. It starts with your message. Your business might be the best, but if you can’t communicate the right message, it doesn’t matter how great your business is.
Identify your why. “A really powerful why resonates with folks. If your why is lame, no one will want to invest in your company,” Meece says. Think long and hard about why you are doing this project and why anybody else would care about it?
2. Network. Use your social capital when you launch your campaign. Talk to your friends and family about contributing to your crowdfunding efforts. If you’re persuasive enough, they’ll pony up some cash and encourage their friends to participate. Before you know it, random strangers might be begging to give you money.
Prime the pump. You’d be surprised how well online social networks can fuel word-of-mouth referrals. But it will only happen if you prime the pump. Some crowdfunding experts recommend that you start getting verbal commitments of support from people you know as much as six months before you launch your campaign.
3. Rewards. The last pillar of an effective campaign is the rewards. Example: “If you donate $100, you get to meet the band backstage at our next gig.” People like receiving something for their contributions. That’s why the Pebble watch campaign took off like it did. The company delivered a compelling message and offered worthwhile rewards. People who contributed $115 received one Jet Black Pebble watch. The campaign also offered other rewards for different contribution amounts.
So, if you’re tired of hitting funding hurdles, give crowdfunding a try. If you do it right, it might exceed your wildest expectations. Just remember, there’s no such thing as free money. Running a successful campaign will require effort, time and commitment.
If you have any questions, please email them to firstname.lastname@example.org or ask them in the comments. As always, the Grow America Team is here to help you make your business successful so that you can create jobs in your community.