Crowdfunding is an increasingly popular option for any small business looking to raise money and it’s one of the most accessible ways of financing a new idea or product. But launching a successful crowdfunding campaign isn’t as easy as setting up a page on Kickstarter or Indiegogo and waiting for the money to roll in.
In this guide, we’ll look at how to plan, prep, and launch a successful crowdfunding campaign, as well as how to transition your idea into an enduring, self-sustaining business once your campaign is over.
What is crowdfunding?
Instead of seeking a large sum from a single source, like angel investors or a bank, crowdfunding raises small amounts of money from a large number of people—often in exchange for direct rewards—who want to see a project succeed.
The concept of reaching a fundraising goal through crowdfunding isn’t new, but over the past decade or so, online platforms like Kickstarter, Indiegogo, GoFundMe, and Crowdfunder have made the process of raising money online for a business, product, or charitable cause easy and accessible to everyone. They serve as virtual matchmakers for entrepreneurs and backers, provide the structure and space to host your campaign, and the ability to accept funding.
How does crowdfunding work?
Crowdfunding sites offer you a place to host your campaign, usually in exchange for a percentage of the money raised. Backers are given various “rewards” based on the level of funding they provide. These rewards can include an exclusive promotional item, advance access to the product being supported, or some form of public recognition—the more funding offered, the better the reward. (Some campaigns offer equity in place of rewards, but in this guide, we’ll focus on the latter model.)
Most crowdfunding websites require you to set a financial goal for your campaign, as well as a timeframe in which to reach that goal, usually between 30 and 90 days. Some platforms let you keep all of the money raised during a campaign, whether you meet your goal or not. Others, like Kickstarter, use an all-or-nothing model that returns funds to backers if your campaign falls short.
If your campaign is successful, you’ll be in an excellent position to transition into a sustainable business by leveraging the audience built through your efforts crowdfunding.
Other types of crowdfunding
Projects that rely on crowdfunding or online fundraising generally fall into one of three main buckets:
- Equity: Equity crowdfunding gives contributors partial ownership of a business in exchange for the capital they provide.
- Donation: Donation-based crowdfunding provides no financial rewards or incentives for backers, so it’s most often used for charitable purposes.
- Rewards: As covered above, any type of crowdfunding campaign that incentivizes contributors with rewards (but not a stake in the resulting business) upon completion can be considered rewards-based. We’ll mostly focus on this approach throughout the rest of our guide.
The benefits of crowdfunding
Crowdfunding offers several valuable perks on top of being a great way to raise startup capital.
Validating your ideas
The more you know about the target market for the product or business you plan to launch, the more you’ll reduce your financial risk, and crowdfunding can be an excellent tool for conducting market research.
Pre-selling your product via a crowdfunding campaign helps validate your creative projects by giving you a solid answer to the question, “Will anyone buy this?” Manufacturing your product without any indication of how it will sell could cost you a significant amount of time and money if it turns out the demand for your idea isn’t strong.
Knowing people want what you’re selling allows you to plan and scale your business with confidence.
Building a following
Having a solid following before you ship your first product is a rare and significant advantage. When done properly, crowdfunding, especially when combined with social media and press coverage, can help you build a dedicated audience that will ideally stay with you as your business grows.
Creating an accessible source of funding
Securing financing can be both time-consuming and difficult for many new business owners. Untested ideas or new business models may not appeal to conservative lenders, like banks, and while finding private investors to help raise funds is an option, you’ll usually need to give up a portion of ownership in exchange.
Running a successful crowdfunding campaign can be a big undertaking, but for many founders, it also can be easier and more rewarding than traditional methods.
What can I crowdfund?
There aren’t many restrictions on what types of products or businesses can be crowdfunded, but the most successful projects tend to have a few key things in common:
- A specific product. If you look at the biggest crowdfunding success stories, you’ll find most of them focused on funding individual products, not stores. There’s a reason for that: backers tend to want to support tangible items, not broad ideas. For the best chance of success, seek backing for your best product. You can build a store later, after your initial idea has taken off.
- A targeted, niche audience. Create a product that fills a need or a gap, then find the market that craves it. Often, founders create products that solve a problem that exists in their own lives, like MindJournal did when they couldn’t find a journaling tool designed for what they needed. Develop a prototype that taps into those needs.
- Strong differentiation. To generate buzz and attract backers, your product has to be something that can’t be found elsewhere. Do your research to ensure your product is one of a kind.