Crowdfunding 101: How to Use Crowdfunding to Raise Capital for Your Small Business

You’ll need time, money and plenty of planning to run a successful crowdfunding campaign.

Raising capital on Kickstarter helped Tamara Stenn to relaunch her company KusiKuy Clothing Company, which makes hand-knit clothing in Bolivia.

“You have to have your product ready to go even before you raise the money or you can easily get overwhelmed with demand.” -Tamara Stenn (Photo: Tamara Stenn)

When Tamara Stenn relaunched her online business after taking time off to raise her children, cash flow was tight, so she decided to seek capital on Kickstarter. Stenn’s company, KusiKuy Clothing Company, makes hand-knit apparel from Bolivia.

In less than a week, she met half of her $10,000 goal. “It’s been a really great experience,” said the Vermont-based entrepreneur. “But it’s a tremendous amount of work. You have to have your product ready to go even before you raise the money or you can easily get overwhelmed with demand.”

According to Crowdfund Insider, which covers the developing crowdfunding industry, Kickstarter and other popular sites like Indiegogo fall into the category known as rewards-based crowdfunding. Contributions are made in exchange for current or future goods or services. Contributors are “rewarded” with anything from a thank you note to a T-shirt to a product sample.

How to leverage rewards-based crowdfunding

To leverage one of these sites, plan to do a lot of legwork. Stenn, for example, has spent a minimum of 4 hours a day between such tasks as blogging, updating social media accounts and tracking data to make marketing and product decisions.

Kickstarter offers these tips:

Figure out an audience in advance. Who is already in your core network? And how can you expand it? “Gather lists of relevant blogs, media outlets, and online communities — like forums, message boards, or Facebook groups you know will care about your work. If you’re making a board game, think of the games communities you can send word to; if it’s something for kids, think about parenting forums and blogs.” To generate more buzz, consider hosting an event.

Tell a compelling story. Create a project page, complete with images and a video, that explains who you are, what you want to make and why. It can’t hurt to bone up on the concept of brand storytelling first. Also, look at the project pages of successful projects in your category for inspiration. Include sketches or photos of your product if you have them. Share enough details about your plan and budget to demonstrate you know what you’re doing.

Explain the rewards. What free products or other rewards will contributors receive? Consider offering limited or custom editions of your product. Per Kickstarter, “The most popular pledge on Kickstarter is $25 — it’s handy to offer something substantial around that level.” Find a more substantial reward for backers willing to pay $100 or more, and something cheaper for those wanting to pay less. Let them know approximately when they’ll receive the product — and be sure to give yourself more than enough time to deliver.

Figure out a budget. Include every possible expense you can think of. Keep in mind that the site will charge a fee for every successfully funded project. You may also have to pay taxes on the income.

Choose a deadline. Your funding period can last anywhere from 1 to 60 days. “Statistically, though, projects lasting 30 days or fewer have our highest success rates.”

Share updates. “Keep backers engaged through interesting and shareable updates, and encourage them to spread the word about your progress, like this project did. Backers aren’t just looking for updates on when their rewards will show up — most of them love a look at the details of how work like yours is actually made.”

According to crowdfunding expert and business attorney Kendall Almerico, Kickstarter’s average successful raise is under $20,000 — “and it’s hard to start a business for $20,000.” But there’s now another option.

How to leverage equity-based crowdfunding

The new player in the field of crowdfunding is known as equity crowdfunding, where contributors receive equity in your business rather than goods or services.

According to one set of regulations recently approved by the Securities and Exchange Commission (SEC), a company can now raise up to $1 million during a 12-month period through investments made by individual investors who go through an SEC-regulated intermediary called a funding portal. Examples of these funding portals include WeFunder or FlashFunders.

Under a second set of regulations, a company can raise up to $50 million during a 12-month period through investments made by individual investors through a broker-dealer on a platform like BankRoll.Ventures or SeedInvest.

“These new regulations can be transformative,” said Sherwood Neiss, principal at Crowdfund Capital Advisors and partner at Crowd Capital Ventures. Neiss is also co-author of “Crowdfund Investing for Dummies.” “They provide a new way for small business owners and entrepreneurs — an underserved market — to find funding. When traditional lending sources say no, crowdfunding may be the solution.”

An equity crowdfunding campaign takes a lot of prep work, advised Neiss. He offered these tips:

Understand the regulations. “Education cannot be underestimated. If you don’t understand the law, hire legal and financial advisors who do.”

Attract a crowd. “This is not a fishing expedition,” Neiss said. “You’re not only using technology to facilitate raising money, you’re using it to develop a following.” Blog, tweet, post photos on Instagram — in other words, develop a presence online. You need your friends, family and community to be behind you and spread the word.

Use pictures to tell the story. “We’re an attention-deficit society,” said Neiss. “People don’t want to read a long business plan.” Create a polished, engaging video that’s no more than 3 minutes long. “Get your ‘ask’ upfront, talk about your vision and how you’re going to use the money investors give you.”

Take time to plan. “You need time (at least 6 months in upfront research), energy and a ton of people behind you before you’re ready to go live,” Neiss said.

You’ll also need to invest your own funds first, according to Almerico.

“To raise a significant amount of money, you need to put in money upfront,” he said. Legal, accounting, compliance and securities fees will run you a minimum of $5,000 to $10,000, and more if you hire an experienced team of advisors, he noted.

And even if you’ve done all the work, “this isn’t a field of dreams,” cautioned Almerico.

According to Crowdfunder, an equity crowdfunding platform, successful campaigns tend to:

Get lead investors. Have at least 5 to 10 percent of your funding lined up before going live; prospective investors will want to get in on a good thing.

Time the campaign well. Make it long enough for you to reach your goals, but not so long that the buzz is lost and people lose interest; 45 to 60 days usually works well.

Follow up. Pledging an investment is not the same as making it. Stay in touch with your prospective investors and encourage them to make good on their pledge in a timely manner.

To learn more about crowdfunding, visit the Small Business Administration and the Small Business & Entrepreneurship Council.

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