Crowdfunding. It’s a word being thrown around in start-up groups and at entrepreneurial events. But what does it really mean? And what should businesses be aware of before they go down the crowdfunding path?
“I think the key element of crowdfunding is trying to get small amounts of money from a large amount of people,” said Steven Bradford, a University of Nebraska-Lincoln College of Law professor.
Bradford is an expert in corporate law, accounting and securities regulation issues at UNL. He has studied the intricacies of crowdfunding since 2010 and has testified before Congress and published articles in the Columbia Business Law Review about his crowdfunding research.
The idea behind crowdfunding is that it allows the general public to help an individual raise money for an idea or business, Bradford said.
Popular crowdfunding platforms, like Indiegogo and Kickstarter, allow individuals to see a variety of crowdfunding campaigns in one location and fund an effort according to their interests. Typically, funders receive a tangible reward for funding a project as determined by their donation and the business they fund.
It’s a funding process fueled by the Internet, Bradford said, and it allows people to fund projects from around the world. But there are a few things businesses should consider before starting a crowdfunding campaign.
Here are Bradford’s top five tips for businesses to keep in mind when considering crowdfunding:
#1 It’s not free. Crowdfunding platforms require users to give up a percentage of their earnings. Fees can range from 8 to 12 percent of each project to cover tax and credit card fees. Some sites even tack on an extra fee if the fundraising goals aren’t met in the allotted time.
#2 Crowdfunding isn’t for every business. While crowdfunding has its benefits, not every campaign is successful. Bradford said the most successful campaigns are usually for the “sexy” businesses in the film, art and tech realm. These industries tend to have a more emotional pull on funders than, say, a manufacturing company making widgets. Crowdfunding takes a lot of time, cautioned Bradford, and like the old adage says, time is money.
#3 Stories matter. Bradford encourages businesses to understand their own story before trying to get funders to buy into their business. A good story goes a long way, and the better a business can tell its story the more likely it will succeed. “Excitement matters,” Bradford said, adding that people are more likely to give if they are excited about a project.
#4 Communicate, communicate, communicate. Before a business starts a crowdfunding campaign, it should plan on communicating with people who donate, Bradford said. It may seem simple, but sometimes businesses forget to keep funders in the loop by giving them pertinent updates and results on a consistent basis.
#5 Prime the pump. Before posting a campaign, lock in a handful of donations that will be posted shortly after the campaign goes live. (Hint: Hit up friends and family.) It’s a crowd effect, Bradford said: If potential funders see a project that has not been funded, they are less likely to be the first person to put up a donation.