Crowdfunding for Small Businesses

Crowdfunding for small businesses is not a new phenomenon, but the expansion of social media has created numerous platforms for entrepreneurs to utilize.?There are platforms focusing on the funding needs of minorities, women, technology firms, gamers; while others specialize on amount specific funding needs.?Industry experts suggest that those seeking funding should consider the following:

• The type of funding
• The desired dollar amount
• ?Platform usage fees (including funding and payment processing fees)
• The platform’s audiences
• Read the platform(s) fine print to be sure you meet their requirements
• The success rate of the chosen platform
• The size and public reputation of the platform

?One way to address the platform that could be the best fit is to assess which type of crowdfunding you are seeking.?There are three different types of funding sources:

1. Equity Crowdfunding:

Investors receive a percentage of ownership in the enterprise in exchange for their investment. This is a more traditional source of funding and there are three types:

Equity 1:

• Private funding via accredited investors
• Fewer investors and less regulation

Equity II:

• Businesses can advertise opportunity publicly
• Can accept funds only via accredited investors

Equity III:

• Public advertising of needs and goals
• Receive funds from a lot of sources
• Highly regulated by SEC

Advantages include:

• There is no need to repay investors
• Can raise up to $5 million per year from investors

Disadvantages include:

• Funding pitches require a lot of information about the venture
• There are fairly strict state and federal filing requirements

2. Donation Crowdfunding:

Donors give based on their belief in the business being created. There are no requirements for repayment or giving up a percentage of ownership.

Advantages include:

• The amounts received do not need to be repaid
• Donors do not receive any ownership

Disadvantages include:

• The amounts received are typically small
• The success rate in raising the amount needed is low

3. Reward Crowdfunding:

Also known as “seed crowdfunding". Similar to Donation-based, but offers a reward to donors in the form of a product or service. It is a good way for a new business that is launching a new product to source funding. Businesses can gain exposure and test the market for their new product.

Advantages include:

• Attract more donors and more attention to business
• Anyone can contribute to the enterprise

Disadvantages include:

• To be successful the enterprise will need an extensive investor base
• You many need to return funds if funding goal is not met?

Regardless of the crowdfunding source selected, there are recommended steps for all users to employ, which includes:

Before the Campaign:

• Plan ideas, goals, audience, and story
• Get platform approval for the campaign

During the Campaign:

• Promote (repeat)
• Adjust funding goals if needed
• Limit expectations and remain positive and focused

After the Campaign:

• Be transparent with investors, donors, etc.
• Ask for feedback on campaign
• Plan ahead with accountant and others to address future tax issues

Additional guidance includes:

Solidify your idea:

The goal of crowdfunding is to secure money from multiple sources, which means you need to convince diverse audiences that your idea is worth the investment.?You should assess the following:

• ?Saturation: how crowded is the industry and what are the entry barriers
• Competition: how competitive will the business be among existing rivals
• Inimitability: is the idea truly unique and why will people want it (a/k/a what is your niche)

Identify your audience:

The broader the potential audience for the campaign, the more likely you will meet your funding goal.?Investors will inject funds for a product or service to which they can relate, prepare to tell investors exactly how the funds will be used.?Consider the following:

• Motivation: what do you want your audience to do
• Intention: who would be the most interested in doing that
• Solution: why and how does your idea solve their problem

Develop and share your story:

Investors will likely take an interest in the “back” story. It should include your reasoning for developing your idea, your plan for solving challenges, and expectations for growth and success.?Key questions include:

• Passion: why do you believe in the idea
• Reflection: challenges that impacted the idea
• Direction: what is the mission for the idea

Set your funding goals:

Early in the process you will need to determine how much you need to start the business so you can work towards profitability.?Focus on answering the following questions:

• Selection: what are the costs associated with the platform chosen.?Why did you choose a particular platform
• Pivotability: if fundraising goal is not met will the funds raised be forfeited
• Expansion: if the target is exceeded, how will the additional funds be used

Promote the campaign:

The first goal is to be accepted by the chosen platform and it is likely that during this vetting process the plan will require adjustment or modification.?Fundraising is the result of relationship-building.?The key question is “why” should investors put their funds into your proposed business.?Questions to consider:

• Networking: are there any industry influencers that could promote the business
• Advertising: are there industry-specific events you can attend to promote the business
• Gratification: show your appreciation to your investors

Transparency is critical:

It is critical to create measurable metrics that showcase the success of the campaign and to share them with investors.?Consider the following:

• Foresight: are there potential issues that you cannot solve
• Insights: have investors had these same challenges before
• Proactivity: if goals are not met, how will that be shared with investors

Seek feedback and act on it:

No campaign launch will be without issues and building a relationship with key investors is critical for the future success of your enterprise.?The best way to do this includes:

• Hindsight: how could the campaign have been more successful
• Resourcefulness: try tapping into crowdfunding forums/blogs for additional feedback
• Personalization: seek friends and others for personalized recommendations

There are online platforms available for those interested in finding out more about crowdfunding.?These include:

• Udemy: their course introduces crowdfunding, including regulations, history, etc.?The cost is $29.99 and is good for beginners seeking an introduction on the topic
• Wharton School of Business via Coursera: their course is analysis-driven that uses a huge base of successful and unsuccessful crowdfunding campaigns to help participants improve their campaigns.?Their program is free (but it does require a monthly Coursera membership of between $34-79).?This program is best for advanced users that focus on data-driven insights
• Skillshare: their course is instructor-led that focuses on specific platforms and crowdfunding strategies.?Their program costs $13.99+ per month and is best for users interested in niche crowdfunding topics

The focus of this blog post is to share some of the nuances of the crowdfunding process and is not intended to provide an analysis of the platforms available.?We hope that this information will help guide entrepreneurs and small business owners that wish to investigate the burgeoning crowdfunding industry as a potential source for funding needed to start or grow their business.?It should also be noted that many of the recommendations to help fund a successful campaign are similar to those used for traditional funding sources.?

If you still have questions or would like to discuss funding plans with a business advisor, please contact your local Virginia Small Business Development Center and schedule an appointment. You can find your local Virginia SBDC on our website here: https://www.virginiasbdc.org/office-locations/

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About the Author:

Mike Austin?was the recipient of the Virginia SBDC Network 2021 State Star Award.?This award was presented in recognition of the tremendous impact he had both here in Hampton Roads, and throughout the Commonwealth with his work on access to capital. A life-long resident of Hampton Roads who spent 37 years in the banking industry, Mike began his career in 1979 with United Virginia Bank, when he gained experience and is expertise in small business and SBA lending.?His career included stints at Bank of Tidewater, Resource Bank, and finally Fulton Bank.

During over three decades of work experience he reviewed thousands of small business applications and approved hundreds of SBA backed and bank-direct loans. In addition, Mike became a frequent content expert speaker at local small business training sessions, helped to set up a local micro loan fund and was a member of the Board of Directors for the SBDC of Hampton Roads.??

Following retirement in early 2017 he started working on a part-time basis as the Access to Capital Adviser for the SBDC of Hampton Roads.?His work with this group greatly expanded in response to the COVID-19 crisis with a focus on the range of SBA-backed loan and grant programs being offered to small businesses throughout the Commonwealth via our statewide network.??