Are you having problems with locating the funding for your small business?
With the economic downturn, banks and other financial institutions have tightened their grip, making it extremely difficult for small businesses to obtain loans. What most people do not know is that there is an alternative source of capital that entrepreneurs can tap into to get their startup off the ground. It is called crowdfunding!
What is crowdfunding?
Crowdfunding is an innovative source of financing that can help strapped small businesses make it through hard times. It is the result of collective effort, attention, cooperation, and trust by people who pool their money together in order to fund a cause, project, or business -- usually via the Internet. The basic idea is to raise money through relatively small contributions from a large number of people. In a sense, crowdfunding is a cross between crowdsourcing and microfinance.
In effect, crowdfunding democratizes the investment process, benefiting small businesses and allowing people with low incomes to invest. With crowdfunding, you now have a tool with which to counteract financial and investment crises that affect businesses, particularly startups.
Normally, you would obtain financing by seeking funding from venture capital firms, angel investors, and other traditional lending institutions. However, the process can often be long and tedious, and with very little chance of success.
Crowdfunding has changed all that. Now, entrepreneurs can by-pass traditional lending institutions by interacting directly with numerous, potential investors, and asking them to invest in their ventures.
How does crowdfunding work?
How do you convince hundreds or even thousands of people to donate amounts of money -- ranging from $10 to $100 -- to your new project or business?
Follow these five steps to make crowdfunding work for you:
- Promote your venture. The crowdfunding campaign should be your last step after laying down the foundation that assures people of the strength of your new venture. Create a blog about your venture. Also, utilize Facebook, Twitter, Linkedin, and other social network accounts to spread the news about your new venture. Write articles, post teaser videos, and give interviews in order to keep your supporters updated. Keep your potential supporters excited about your project by involving them. Solicit not just money from them, but also ideas and suggestions as well. Later on, when it’s time to ask for financial support, they will feel that they own the project too and be excited about your success.
- Offer rewards. For every donation, offer some kind of "thank you" gift. Be creative. If people donated money for your new bakery business, you can send them a loaf of bread along with a personalized note.
- Pre-sell goods. Offer donors a valuable good for donating to your new venture. For example, you can reward donors with $200 worth of your product for every donation of $300. Again, you should be creative. Another way you can accomplish this is by offering a discount certificate to every donor.
- Tell potential donors how much funding you need. Create a budget and make sure that you can accomplish your project with the amount you are targeting to raise. Crowdfunding is all about transparency and trust. Make sure you can deliver on your promises.
- Set realistic goals. If you are planning to tap onto crowdfunding, make sure that you possess the knowledge or ability required for your project. Either fully deliver on your promises or don’t do it at all.
So where do you go for crowdfunding?
Crowdfunding websites are an online community of small investors that can provide financing for your project or business. Most of them have been specifically established to fund startups, creative projects, or to help entrepreneurs meet specific needs within their local communities or marketplaces.
Here are a few examples of crowdfunding sites for entrepreneurs:
You have seen how crowdfunding can be a great way to raise funds. However, it has a number of other non-monetary benefits too:
- Demonstrate that other people believe in your project.
- Raise awareness and create a network of backers or advocates. At the very least, you are able to enjoy the benefit of word-of-mouth marketing as people talk about your project.
- Pre-sell. This is a great way to test the market for your product.
- Gather public support. People do participate in worthwhile projects and offer valuable feedback!
In summary, crowdfunding is an excellent way to raise startup capital or to finance projects, but many successful entrepreneurs and project managers consider its non-monetary benefits to be more valuable than the actual funding benefits.