In an incredibly short time, crowdfunding has revolutionized the way entrepreneurs launch their start-ups. Crowdfunding serves as a practical way to test a business’ proof of concept and even gain pre-orders from potential customers prior to launch. However, as with any tool used to grow a small business, it’s important to develop a solid strategy before making the decision to rely on crowdfunding.

Traditionally, entrepreneurs have turned to banks and other private lending companies to secure small business loans that could help them launch or grow their business. However, financing through a bank is not always a viable option for everyone.

Crowdfunding allows small businesses to raise capital from a large pool of individuals in tiny increments. For example, Hopsters, a brewery in Boston, raised $1,311,000 from 713 investors through the crowdfunding platform called Wefunder.

“With recent regulatory changes and the arrival of new platforms, crowdfunding can be relevant and valuable for a wide variety of entrepreneurs and small business owners, throughout their life cycles,” states Jonny Price, Director of Business Development at Wefunder. There are various approaches based on what type of business you’re in.

  • For nascent mom and pop shops, Kiva’s 0% interest microloans (currently up to $10,000) can be a great starting point and arerelatively easy to get.
  • For CPG companies or creative economy businesses, perks-based crowdfunding can validate product-market fit and build a customer base.
  • For fast-growing tech startups or CPG companies, Regulation Crowdfunding can be a great way to raise equity from non accredited investors.
  • For local businesses, Regulation Crowdfunding can also be used to raise debt – for example, through a revenue share deal.
  • Even for more advanced startups that are raising Series B and beyond, Regulation A+ crowdfunding (a mini IPO) enables you to raise up to $50 million from the crowd, albeit with more significant upfront legal requirements.
  • And of course an Initial Public Offering could be seen as the pinnacle of crowdfunding.

There’s also reward-based crowdfunding, which is when investors agree to fund the start-up but receive something in return, such as the company’s product. Credit-based is similar to traditional lending, where individual investors agree to let entrepreneurs borrow money as a line of credit and receive payments plus interest in return.

Lastly, equity-based crowdfunding is when individuals invest in a start-up gain equity in the new company, producing dividends if the concept becomes a success.

The concept of crowdfunding is appealing for many reasons. First off, if you have a community of people who knows you, trusts you, and passionately believes in you, then crowdfunding could be a great fit.

Small business owners can also massively benefit from turning their customers into investors, and their investors into customers. When VC firms invest in startups, they provide social capital as well as financial capital, including connections, legal advice and marketing support.

Next, crowdfunding can be a low-risk way to test-drive a new business concept, and a successful campaign can lead to increased brand awareness and consumer trust, opening the door to more funding options and increased sales down the line.

On the other hand, you have a responsibility to fulfill your idea, or you may burn some relationships and disappoint the people who believed and invested in you from the beginning.

“You should not assume that you can just post your crowdfunding campaign and blissfully watch as the money rolls in,” adds Price. “In almost all cases, you will need to hustle hard to get your network to invest in you – both your friends and family, your customers and social media following.”

Another potential pitfall is having your intellectual property stolen. If your idea is highly unique, consider filing the necessary copyright, patent, or trademark paperwork prior to a crowdfunding campaign.

So what does it take to ensure a successful crowdfunding campaign?

Extract as much feedback as possible from friends, family and customers before you publish your campaign.

Is it extremely and immediately clear to them what your business does? Why it’s awesome? What you will spend the money on? What the investment case is?

Put yourself in the investors’ shoes and craft a compelling pitch. Make sure you get the pithy elevator pitch out early but provide sufficient details for investors to dig more deeply, as you pique their interest.

Be polished and professional obviously, just as you would with a resume. Any small errors or inaccuracies can undermine backers’ or investors’ confidence.

Be thoughtful and dynamic when you engage with your network. Justin Renfro, who ran an Indiegogo campaign for his business Chill Charters, wrote handwritten letters to over a hundred people. Of the 141 backers on his campaign, almost all of them were from his own personal network.

Lastly, don’t assume crowdfunding is going to be easy. Pursue it if you are confident in your ability to get your own network to invest in you and build early momentum for your campaign.