Running Your Business

What You Should Know About Crowdfunding for Business

  • If you want to start a business, but are not independently wealthy enough to invest your own money, crowdfunding might be the answer

  • Crowdfunding is when a group of people donate money to help you accomplish your goal

  • In order for your crowdfunding campaign to be successful, it's important to have a clear product and a realistic timeline

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Posted by November 29, 2017

So, you want to start a business, but are not independently wealthy enough to invest your own money. Have you considered crowdfunding for business?

This method might be the answer you’re looking for. But first, there’s a lot you should know.

What Is Crowdfunding?

Crowdfunding is when a group of people donate money to help an individual or organization accomplish a goal. You can use crowdfunding for any number of things, from paying for your wedding to funding your new business. Typically, this is done via the internet on any number of crowdfunding sites. Kickstarter and Indiegogo are the most popular crowdfunding sites for business.

What Type of Business Does Crowdfunding Work Well For?

If you look at the types of businesses that have been wildly successful raising money this way, you’ll notice they have something in common: they create a product that individuals want to own. Watches, games, backpacks and fidget toys are the types of things people want. Crowdfunding is less likely to work for a great software idea that will help Fortune 500 companies.

If your business idea is to produce a product that will be used by individuals, crowdfunding might be a great way to not only raise funds, but also get people talking about your product.

How It Works

A typical crowdfunding campaign includes an explanation of the product or business idea, as well as any available photos or videos of prototypes. Typically, the entrepreneur will offer an opportunity for the funders to be the first to purchase the product when it’s released. Basically, they offer a pre-purchase of the product rather than a share in the company. For instance, the super successful Kickstarter campaign for Everyday Bags listed what individuals would receive for every amount donated: $115 meant you’d receive an Everyday Sling in the color of your choice, a discount from their $150 price point. Meanwhile, $219 meant you’d receive an Everyday Backpack.

Crowdfunding for Business Tips

Have a clear product. As you’ll note, when Everyday Bags ran their campaign, there was a clear product with a ready prototype. In order for your crowdfunding campaign to be successful, you need to be at an advanced stage in the ideation process. For example, if you want to sell a computer game, the game itself doesn’t need to be finished—but the details of the game (characters, rules, objectives, etc.) need to be clearly defined and drawn out, so that people know what they are getting.

Have a realistic timeline. If you raise the money, when will you realistically be ready to deliver the product? If you don’t have any idea, you’re probably not ready to crowdfund. Your investors are your customers, and they won’t be happy if things don’t flow smoothly.

Take, for instance, the Kreyos Meteor watch. It raised an impressive $1.5 million dollars, but then everything fell apart. Why? Their production was untested, the price was too low, the products weren’t released on schedule and when they were, they were not what the early crowdfunding buyers expected. You need to be clear about your product, your manufacturer and your timeline if you want crowdfunding to work for your business.

Be wary of thieves. Remember, as soon as you put your idea on the internet, it becomes easier to copy and steal. Unscrupulous people can take your ideas and manufacture them before you’re ready to. This is another reason why you need to be reasonably close to manufacturing the product and clear about your timeline.

The last thing you want is to see your idea manufactured in China, putting you out of business before you even start. As Quartz points out, “there’s no guarantee that you can stop someone from copycatting your product.” But there are ways to avoid the issue—like applying for utility and design patents—that you can explore.

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