Simple Steps for a Successful Crowdfunding Campaign

Historically, a lack of access to capital has been the single biggest obstacle standing between most people’s great business ideas and their ability to turn those ideas into profitable businesses. For years, would-be entrepreneurs who couldn’t borrow from a bank or raise funding privately were basically frozen out of business ownership.

The rise of internet-based crowdfunding platforms has shifted that paradigm. However, crowdfunding is not as easy as just starting a campaign, raising money and becoming a tycoon. To run a successful crowdfunding campaign, you must plan carefully and execute that plan diligently.

What is Crowdfunding?

Imagine you and all your friends were big fans of Captain America. Then one day, on a trip to your local comic book store, you see a copy of the very first issue. The problem is you don’t have enough money to buy it. So, you and your friends pool your resources and buy it together, then share in the profits down the road when you sell it. That’s a simplified version of crowdfunding.

Crowdfunding happens when you get a group of people or backers who have enough belief in a project or an idea to put their personal funds behind it and bring that idea to life. If you want to start a business but the banks have been turning down your Small Business Administration (SBA) loan applications — or your business idea doesn’t even qualify for an SBA loan — it might be time to consider a crowdfunding campaign.

What Types of Crowdfunding Campaigns Are Available?

One of the best aspects of crowdfunding is that there are so many different types. Almost all of them allow you, the business owner, to get funding for your company without having to take out a loan.

The first crowdfunding platforms were donation or bonus-based. People often used donation-based crowdfunding to fund things like medical procedures or a once-in-a-lifetime vacation. You probably remember seeing these types of campaigns in the early days of crowdfunding platforms like GoFundMe.

It wasn’t long however before would-be entrepreneurs realized that crowdfunding could also be used to fund businesses or business expansion. Most of these early forays into business crowdfunding were what is known as bonus-based. In a bonus-based crowdfunding setup, the backers receive a bonus or reward when the campaign hits its target. Under this plan, a clothing maker might offer a set of one-off, limited-edition clothes to the original funders.

As more crowdfunding platforms began popping up for businesses, the campaigns became more focused on generating monetary returns for investors, leading to three main types of business crowdfunding.

• Debt crowdfunding: In this type of crowdfunding, investors invest in managed funds to purchase debt, debt instruments or bonds. This debt is usually secured by a tangible asset. More often than not, the asset securing the debt is real estate.
• Royalty crowdfunding: In royalty crowdfunding, the investors put money into a specific project and receive a percentage of the proceeds in that project. Under royalty crowdfunding, investors are not buying into a particular project the business or business owner is crowdfunding or a share of the entire business. For example, a clothing company raising capital for a new line might crowdfund it and pay the backers a royalty on the sales of the new line but not a share of the entire company.
• Equity crowdfunding: This is the most common type of raising crowdfunding capital. In equity crowdfunding, investors purchase an equity share of the business they invest in.

Equity crowdfunding investors become partners with the business owner running the campaign. This might sound like purchasing stocks, but there are some key differences between equity crowdfunding and selling stocks.

Equity crowdfunding is available to accredited and nonaccredited investors. Although investors can only buy stocks from a broker who is licensed by the Securities and Exchange Commission, there is no such requirement with equity-based crowdfunding, which means investors can buy shares directly through the crowdfunding platform.

This doesn’t mean that equity crowdfunding comes with no strings attached. Even though they aren’t classified as stocks, most equity crowdfunding offerings are subject to government regulation, which ensures the interests of the investors are adequately protected.

StartEngine is an example of an equity crowdfunding platform with many offerings that are classified under Regulation A+ and Regulation CF. This makes StartEngine a great starting point for business owners in their search for a good equity crowdfunding platform.

5 Steps to Manage a Successful Crowdfunding Campaign

If you like what you’ve read so far, and you want to start your own equity crowdfunding campaign, here are steps you can take to help improve your chances of success.

1. Find Lead Investors

Imagine a poster for a rock concert. The more famous the band headlining the show, the more people will come to see it. Think of your crowdfunding campaign the same way. The lead investors in your crowdfunding campaign are the headliners. That’s why finding lead investors with a history of investing in profitable campaigns will go a long way toward making your equity crowdfunding campaign a success.

This is true for several reasons. First, having lead investors is a signal to other investors that your business is viable enough to put money into. Second, many crowdfunding platforms have eligibility requirements, and if your business has no lead investors, or is completely unfunded, your business may not be eligible. Finally, good lead investors can use their experience to get your company moving in the right direction and attract added visibility to your campaign.

2. Welcome Nonaccredited Investors

Welcoming nonaccredited investors to partake in your crowdfunding campaign is an important step. Accredited investors are people who can verify that they have a certain net worth. Theoretically, that allows them to absorb the potential losses that come with buying traditional stocks. 

You will cast a much wider potential investor net if you run your equity crowdfunding campaign on a platform that has ample offerings for nonaccredited investors. When you’re choosing a platform, make sure you choose one that not only accepts nonaccredited investors but actively welcomes and seeks them out.

3. Set Long-Term Goals

Whenever you do an equity crowdfunding campaign, you’re selling off a piece of your business. This isn’t a loan that you’ll pay back. This is a long-term business partnership you are establishing with your investors. That factor only underscores the importance of setting long-term goals.

Think carefully about what you are going to do with the funds you raise, how much money you’re going to need and how much of your business you’re willing to give up to get the money. That can only happen if you take the time to set concrete long-term goals for your company. If you don’t, you may end up mortgaging off a large chunk of your business for less money than you need to get it all the way off the ground.

4. Use a Crowdfunding Platform That Does the Work for You

You can choose from a lot of crowdfunding platforms, which means you need to do a lot of research before choosing one. Crowdfunding platforms focus on different business sectors. Some specialize in startups, while others are biotech-oriented and others focus on gaming. Your goal in choosing a platform should be finding one that caters to your particular business to attract the right kinds of investors.

You want a platform that will do as much heavy lifting for you as possible. If you choose a platform that requires you to spend lots of time marketing your company yourself, you create extra work. The platform you choose should have a prominent social media presence and a long email list of past investors to pitch your business proposal. The less of that work you have to do, the more time you can spend running your business.

5. Set a Reasonable Minimum Investment Level for Your Crowdfunding Campaign

The logic here is simple; if your minimum investment is too high, you’re going to scare a lot of potential investors off. Remember, your crowdfunding campaign is not a stock offering, and your ideal target is nonaccredited investors. A high buy-in will only encourage nonaccredited investors to move on to the next, more affordable opportunity. On the other side of the equation, accredited investors will likely opt for a high-priced, blue-chip stock over an unproven, highly-priced crowdfunding offering. So, set your minimums wisely.

Crowdfunding Revolution

Equity crowdfunding has forever changed the way startups and businesses raise capital. The bank is no longer the only game in town, and it’s possible to raise capital by selling equity in your business to nonaccredited investors all over the world. This practice was unheard of even 15 years ago. Equity crowdfunding poses unique challenges, and your ability to master them is the key to a successful campaign. Here at Benzinga, you will find lots of helpful information to help you meet those challenges and get the most out of your crowdfunding campaign.

Frequently Asked Questions