How To Use Crowdfunding To Save Your Business


Your business is in trouble and you need to raise cash fast! Every small business or startup reaches this stage at some point. The traditional choice would be to go to a bank and hope the loan officer extends you credit.


Can you use crowdfunding to save your business? The answer is yes. You can run an equity crowdfunding campaign to raise capital by issuing shares or convertible debt, a rewards campaign to test a new product that will bring cash in before you need to mass produce it or even ask for donations.


As you can see, there are three options you have. Which option you pick depends on the state your business is in.


Read on to find out how you can figure out which campaign type is the best for you and how you can run a successful campaign.


What is Crowdfunding?


Crowdfunding sounds complex but is actually a really simple idea. Any individual or business can run a campaign to solicit donations from a crowd of people in exchange for something.


For example, you could seek contributions towards building a hospital or an animal shelter and so on. The idea behind this is 100 people contributing $10 makes it easier to raise $1,000 than a single donor giving that much.


While crowdfunding started off as a donation based vehicle, these days there are different kinds of crowdfunding campaigns that you can run. These are:


  1. Equity campaigns

  2. Rewards based campaigns

  3. Donation based campaigns

  4. Debt based campaigns (also called P2P lending)


Each of these campaigns have their own nuances and the types of people who back them are accordingly different.


This is largely because the ultimate aim of running these campaigns is very different. An equity campaign seeks to reward its backers in a very different way than donation based campaigns do.


Can Crowdfunding Help Businesses?


Yes it can! Businesses were one of the first beneficiaries of the crowdfunding phenomenon when it first got started.


Nonprofits regularly use crowdfunding to raise money for charitable causes. These days, the prevalence of equity campaigns and debt based campaigns gives business direct access to cash via crowdfunding.


Furthermore, companies regularly use rewards based campaigns to test new products and to avoid sinking capital into something that doesn't hold much promise.


If you're looking to alleviate your business' cash flow concerns, then crowdfunding could be a great choice for you.

The trick is to choose the right type of campaign for your business. Some businesses lend themselves very well to donation based campaigns.


For example, City Lights Books in San Francisco saved itself thanks to donation based crowdfunding. With Covid-19 forcing a shutdown, they didn't have enough to pay salaries.


A campaign which aimed at raising $300,000 was successful and is more than enough to help them tide over the current pandemic enforced shutdowns.


There are numerous other examples of businesses that have used rewards based campaigns to save themselves as well.


The bottom line is, as long as you can figure out which type of campaign suits you best and as long as you can run it successfully, you stand a great chance of saving your business!


How to Run a Campaign


Running a campaign has three distinct stages and planning all of your activities for each stage in advance is helpful. Depending on the type of campaign you're running, you will end up focusing on each stage a bit differently.


The first stage is pre launch.


Pre Launch


No matter the type of campaign you're looking to run, the pre launch stage is where a lot of the success or failure of your campaign is decided.


The first step is to figure out what type of a campaign you wish to run. A lot of businesses automatically turn towards donation based campaigns since these are what most people think of in times of crises.


Keep in mind that while it's easy to ask for a donation, it might not be the best choice for you. Before you choose to run a donation based campaign, use the below checklist to figure out whether it's right for you:


  1. You are a consumer facing business.

  2. You have a loyal fan base who engage with you regularly.

  3. You're a historic business and are associated with the neighborhood intimately.

  4. You have a good following on social media.

  5. You can draw local news media coverage to your situation before you run a campaign and also during it.

  6. You have a celebrity or a heavyweight influencer who can direct people towards your campaign.


Your business has to satisfy point 1 and one of either points 2 or 3 and two of 4,5 and 6. For example, if you're not a consumer facing business then donation based campaigns will not work for you.


If you are a consumer facing business and have a loyal fan base and can draw local news media coverage along with having a large social media following, a donation based campaign will work for you.


City Lights Books' campaign satisfied all of these six points and they managed to realize their goal within three days! Obviously, the more of these points you can satisfy, the better.

In addition to the campaign type, take the time to think about how much you would like to raise.


With donation based campaigns, setting a target is pretty straightforward. You simply set it equal to how much ever your cash flow hole is.


Let's say the criteria in the checklist don't match well with your business. This doesn't mean crowdfunding cannot save you! You can use the checklist below to see if a rewards based campaign will suit you:


  1. You are a consumer facing business.

  2. You have a product in mind that has the potential to generate large amounts of cash.

  3. You have enough cash to pay for a prototype of a product and produce material around it.

  4. You're a well known business or are known to produce cool products that customers love.

  5. You have a loyal fan base who engage with you regularly.

  6. You have a good following on social media.

  7. You can draw local news media coverage to your situation before you run a campaign and also during it.

  8. You have a celebrity or a heavyweight influencer who can direct people towards your campaign.

As you can see, the criteria for an rewards based campaign is much the same as it was for a donation based campaign. This is because both of these campaign types appeal to similar people when it comes to saving a business.


Truth be told, using a rewards based campaign to save a business is a pretty bold move. However, if you pull it off, pretty much nothing can stop you!


You will need to satisfy points 1, 2 and 3, one of 4 and 5 and two of 6, 7 and 8. All of these elements are needed in order to run a successful rewards based campaign and attempting one without these in place is futile.


Choosing a realistic goal is especially relevant if you're planning on running a rewards based campaign.

In this case, the amount of money you could raise will vary and you'll need to tailor your campaign for maximum success.

Keep in mind that with these types of campaigns, failing to hit your target means you'll not receive a penny. Hence, the success of your campaign is paramount and a lower goal might be more sensible even if it doesn't fully cover your cash flow hole.


If neither of the previous two campaign types suit you, don't despair!


There is still the possibility of you successfully running an equity based campaign where you can raise cash either through equity or through convertible debt.

These will appeal a lot more to business owners who aren't in the consumer facing space.


In addition to this, you will be dealing with backers whose aim is focused on earning a return from the business.


Thus, entrepreneurs who like focusing on the numbers and the viability of the business will find this option far more suited for them.


It isn't all a bed of roses though. Such campaigns will cost you money because there is a cost involved in terms of compliance. In the United States, you will have to classify your business as belonging to either Regulation CF, Tier 1 Regulation A+ or Tier 2 Regulation A+.


Of the three, Regulation CF is the least onerous and you'll have to file audited financial statements with the SEC before launching your campaign. This is assuming you're approved to raise funds on an equity crowdfunding platform.


As you can see, equity crowdfunding involves quite a few steps and businesses that are right on the brink are not suited for it.


However, if you need cash to continue running the business, and to fuel growth, this is the right option for you.


You might think that it's just startups who solicit funds by raising equity but this is not the case. Platforms such as StartEngine regularly host campaigns that are run by more mature businesses that desperately need cash.


So take your time to really analyze your options at this step. Although there are just three of them to choose between, you'll need to delve into the specifics of your business and be brutally honest about which method suits you the best.


Mobilize Your Audience


Who are you audience members and where do they hangout the most? With equity and debt campaigns, this isn't as relevant since the platforms will help you spread the word about your campaign.


With donation and rewards based campaigns though, traffic is everything. You want to spread the word on social media and mobilize your fan base.


Let them know that the campaign is about to be launched and that they should be ready to take whatever action you need them to take.


Contact any local news media or influencer so that you can appear in the media on the second or third day of your crowdfunding campaign.


This will give it a nice boost of additional donations that will get the platforms' algorithm on your side.


Meanwhile, you need to be working behind the scenes to get your pitch ready!


Prepare Your Pitch


Many crowdfunding campaign creators wing the pitch and put it together at the last minute. This is a recipe for disaster!


Here's the thing: Over 50% of crowdfunding campaigns fail.


Why do you think this is? It all comes down to a lack of preparation. Many creators become so immersed in their own needs that they assume their audience will tune into it as well.


This is obviously not the case. Your audience aren't mind readers. You need to be able to translate what your situation is and explain to them clearly why you need the money.


You need to tailor your pitch and create a great video that speaks directly to your audience.


You need to bring them into your world and let them know exactly what you're giving them in return.


Keep in mind that even donation based campaigns offer something to backers. Whether it's a free t-shirt or a feeling of having done some good, you need to communicate this thoroughly without coming across as weepy.


This is a tough balancing act so take your time to figure this out. Too many creators rush through this process and end up raising far less than what they targeted.


Don't be one of those people!


Engage


Once your campaign is live, you can still carry out certain tasks that will give it a nice boost and bring in even more contributors.


Engagement is something that every platform takes into account in its algorithm. The more engaged you are as a creator, the more the algorithm boosts your campaign and this gives you greater organic exposure.


Engagement could take the form of you providing regular updates and thanking your backers. It could involve sharing progress with your product or sharing how things are shaping up.


Plan an engagement calendar as soon as your fundraising begins. It's a good idea to update your audience between three to five days after your campaign has gone live.


Aside from giving you a nice boost from the algorithm, providing updates is also the right thing to do.


Your donors are likely going to feel as if you took their money and then clammed up completely if you don't continue the conversation with them.


Keep Risks in Mind Throughout


While crowdfunding is safe, it isn't without risks. Keep all of the risks in mind and educate yourself with regards to mitigating them.


These risks play themselves out throughout the course of your campaign, right from the preparatory stage to the final step.


What are the Pros and Cons of Crowdfunding?


As great as crowdfunding is, it has a few negative that accompany the positives. Given that so many people overlook the negatives, it makes sense to start with them first.


Cons


The first and most obvious con of crowdfunding is that running a campaign is no guarantee of receiving your required amount of money.


This is particularly true of donation based campaigns where people think that if they simply throw something onto a campaign page, they'll manage to attract funding and hit their goal.


This is far from the case!


A successful campaign takes work and you need to prepare well, engage with your audience properly and communicate your need successfully through your pitch.


So really, the lack of a guarantee isn't a con as much as it is a case of being unprepared. The more prepared you are and the better your campaign's foundation is, the more likely you are to be successful!

The second negative aspect of crowdfunding is that you can get into real trouble if you fail to deliver what you promised.


In the earlier days of crowdfunding, campaign creators got away with making all sorts of promises they couldn't fulfill.



These days though, crowdfunding backers can and will sue you in court if you don't deliver what you promise or if you're found to be misusing the funds in anyway. The platforms take a dim view of this as well and will provide backers with evidence that can be used against you.


This is yet another negative that arises from poor preparation. In the previous section, hopefully you now understand why we spent so much time looking at what to do in the pre-launch phase!


Pros


Crowdfunding is a non traditional way of raising funds and for this reason it is a great way for you to receive a quick cash injection into your business.


Traditional methods of funding require tons of paperwork and are tedious, long drawn out processes. When executed properly, crowdfunding has the potential to give your business just the boost it needs.


It isn't just during troubled times when crowdfunding works for businesses. You can use it to save money while developing and releasing new products as well.


A campaign is a perfect laboratory for you to test the viability of a new product and instead of sinking capital into developing an entire product line, you can use it to test the waters and tweak it according to the market's needs.


All in all, when executed properly crowdfunding is a great tool for businesses to use.


Conclusion


There might be many steps to executing a great crowdfunding campaign but if you can pull it off, you can generate all the cash your business needs.


Saving your business is of the utmost priority and crowdfunding might be a non traditional method of raising cash.


However, it is a method that works!

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