Every entrepreneur knows how hard it is to raise money to start a business. Until you have a company up and running with a proven track record, it can be difficult to secure business funding from financial service providers. Private investors are an alternative, but it can be just as hard to find venture capitalists prepared to risk a large lump sum on your untested business idea. This is why crowdfunding is becoming a popular solution to raise capital for new businesses.

Crowdfunding is already a globally recognised way to raise money for good causes, through small contributions from thousands of people via the internet. Now, entrepreneurs are using the worldwide reach of the internet to crowdfund business start-ups as well. Rather than relying on big investors who would need to risk a large amount and demand a large return, crowdfunding allows you to seek financial backing from friends, family, customers and individual investors around the world. Because crowdfunding relies on a large pool of investors, each investor is risking a smaller amount.
  
 

4 types of crowdfunding

1. Donations

Crowdfunding for good causes usually relies on donations, so those donating do not expect a reward or a return on the investment – they’re investing in a social good. If you can demonstrate that your business idea will have positive effects on your community, you might attract some donations through crowdfunding. But when people invest in a business, they generally expect some sort of return on the investment.
 

2. Rewards

With this type of crowdfunding your investors are, in effect, pre-buying the product or service that your business will provide. This is a useful technique, because by setting a scale of rewards according to the amount invested, you can encourage crowdfunding contributions of all sizes. Once your business is up and running, your investors will expect their rewards – and if they’re impressed by what your deliver, they could become your first brand ambassadors.

3. Loans

Crowdfunding contributions of this type are considered a loan, and you will have to repay them, plus a specified amount of interest, in regular instalments on specified dates. This method can put extra pressure on cash flow in your young business, so make sure you allow enough time in the crowdfunding agreement to get established before you have to start repaying investors.

4. Equity

In this approach, you sell shares in your business, so that investors will reap dividends as the business thrives and grows. You can set a price per share, based on the projected value of your business.
  

How does crowdfunding work?

Some of the most popular crowdfunding sites include Kickstarter, Indiegogo, GoFundMe and Crowdfunder.

BackaBuddy and Thundafund are the most well-known platforms in South Africa. On SimplyBiz powered by Nedbank, entrepreneurs can also receive coaching on how to use crowdfunding to finance their ideas.

You need a good idea and a strong pitch on these platforms to attract crowdfunding investors with an interest in the sector you’re entering. Crowdfunding also has a time limit – usually 30 to 40 days – whether or not you reach your target amount. Most crowdfunding sites require you to return the money to funders if your target has not been reached, so it’s essential that you make every effort to attract investors.

Tips for successful crowdfunding

Plan your finances carefully

Crowdfunding is usually an investment for the funders, so you’ll have to give them something in return. What that is, depends on how you have structured the crowdfunding agreement. Keep that in mind when planning finances and cash flow for your business.
 

Do your homework

Preparing for a crowdfunding campaign takes hard work, a well-thought-out plan, lots of patience, and a sincere, inviting pitch to investors.
 

Choose the right platform

Different crowdfunding platforms each have their own features, fees and requirements. Research a few until you find the best platform for your project and the investors you want to attract.

Create an interesting pitch

You need an interesting pitch to catch the eye of a potential investor – one that explains your vision, the product or service you want to offer, and the effect it will have. Use images and stories to make your pitch interesting and easy to remember.

Set realistic goals

Be reasonable about how much money you want to raise and what you will use it for. Set attainable goals and give updates to keep your supporters interested and informed.

Offer rewards

Give people a reason to donate to your campaign. These rewards could be your products or services, or you can offer discounts and unique experiences, depending on the nature of your business.

Use your networks to your advantage

The success of your crowdfunding campaign may depend on how many people will be interested in your new product or service, but it also depends on making sure anyone who might be interested knows about your campaign. If you are active on social media, you can use your existing networks to get a lot of attention for it. Make sure you join social media groups related to the sector you want to do business in, so that you can target investors already interested in that sector. Ask your friends, family and supporters to share your campaign on their networks.

Engage with your supporters

Talk to your supporters regularly and answer their questions and comments. This helps to build trust with your potential clients and make a strong connection.

Be transparent

Be clear about how you will use the money you raise, and update investors regularly to maintain their trust.

Crowdfunding may be just what you need to finance your start-up. If your business is already up and running, you could also use crowdfunding to scale up production, buy more assets and resources, or expand into new markets, without having to rely on traditional funding.

It is essential, however, that you approach crowdfunding realistically and honestly, and that you can deliver on the value you are promising to investors. Consult your financial adviser to go through your business plan and crowdfunding pitch carefully, to ensure that you stand a reasonable chance of success before you launch a campaign on a crowdfunding platform.