How Crowdfunding Works for Startups

Introduction

If you're a startup or small business, you may be wondering how crowdfunding works for startups. This article will explain everything you need to know about how crowdfunding can help your business raise money and grow. We'll cover topics such as how to create a successful crowdfunding campaign, the different types of crowdfunding platforms, and what to expect once your campaign is funded. So whether you're just starting out or you've been in business for a while, read on for all the information you need about how crowdfunding works for startups and how it might help you!

How Crowdfunding works for Startups: What is it?

So what is crowdfunding? In short, crowdfunding is a way for startups and small businesses to raise money by soliciting donations or investments from a large group of people. This can be done through online platforms such as Seedrs or Crowdcube, or through more traditional methods such as angel investors or venture capitalists. In fact, the two often work in tandem together. The process involves listing your company on a crowdfunding platform, where the public can make investments as small as a few pounds in return for a small piece of equity in your company. A successful campaign will end up with lots of different investors who have all clubbed together for one "chunk" that is split between them.

The benefits of crowdfunding for startups

There are a number of benefits that come with crowdfunding for startups. Firstly, it's a great way to get your business off the ground without having to go through traditional channels such as banks or venture capitalists. That being said, you will have to collect at least a few big ticket investors to close a campaign, so be wary of this. Secondly and more importantly, crowdfunding is a great way to build buzz and excitement around your product or service. This can help you attract more customers and grow your business in the long run. It's particularly helpful for direct to consumer businesses, where the public who see the campaign will likely be your target market. You'll also build up a healthy number of advocates who are, quite literally, invested in your product.

One added benefit is that it gives you further opportunity to put your product in front of users in a controlled environment and iron out any flaws that you might have missed. With a few thousand people seeing an early version, the critique can be direct and sometimes cutting, so a thick skin is required!

A successful crowdfunding campaign is often seen as the ultimate customer validation of your idea but we’re talking equity here, so in return your customer becomes an owner and will do everything they can to see your business grow and succeed.Ben Waterman: COO, Strabo

The different types of crowdfunding platforms

Now that you know how crowdfunding works for startups and how to create a successful campaign, let's take a look at the different types of platforms available.

The two most popular types of crowdfunding platforms are equity-based and reward-based.

  • Equity Based platforms allow businesses to raise money by selling shares in their company. This is a great option for businesses that are looking to grow quickly and attract a lot of attention from investors. This is generally the more relevant option for startups who don't have the time or money to engage in drawn out marketing campaigns and don't yet have a product to offer investors. The premier examples are Seedrs and Crowdcube.
  • Reward Based platforms, on the other hand, allow businesses to raise money by offering rewards to donors. This can be anything from a discount on your product or service to an exclusive behind-the-scenes look at your business. Startups also often operate a SaaS (Software as a Service) monthly subscription model, which makes it harder to offer significant rewards for this type of raise.

No matter which type of platform you choose, it's important to make sure you do your research and pick one that's right for your business. Using the right platform is one of the most important parts of how crowdfunding works for startups. Reach out to them and jump on a call! We found Seedrs to be the best fit for our crowdfund and would use them again in an instant.

How to create a successful crowdfunding campaign:

So how do you go about setting up a successful crowdfunding campaign?

Now that we've covered the basics of how crowdfunding works for startups, let's take a look at how to create a successful campaign. There are a few key things you'll need to do in order to make your campaign attractive to potential donors or investors.

First, you'll need to have a clear and concise pitch for your product or service. This should explain what your business does and why it's worth investing in. You'll also need to set a realistic funding goal. Keep in mind that most crowdfunding platforms will only release the funds if you reach your goal, so make sure it's something you can realistically achieve. The best way to do this is through comparables of other early stage businesses in your sector, revenue projections and macroeconomic market conditions.

Next, you'll need to create a campaign video.This is one of the most important parts of your campaign, as it's your chance to really sell your product or service. Make sure your video is high quality and explains what your business does in an engaging way. It's often useful to hire actors (this can be done cheaply, it doesn't have to be Hollywood!) so that people can see a little segment of your product being used.

Filming the Strabo campaign with the team at Red Robin Films

Often people ask if they need a separate agency to help them with the process. From our experience, this isn't actually necessary: the platforms have dedicated people to help you through every stage of the campaign, and we found with Seedrs that the material / templates / answers they provide are incredibly detailed. 

Then, you'll need to build up a social media following for your campaign. This can be done by creating content that is shareable and by using hashtags to get your campaign in front of potential donors or investors. You'll need to engage in a lot of direct outreach to make sure that there is momentum. One of the lesser known parts of how crowdfunding works for startups is that you'll need to make sure you have enough commitments by the time you want to go live, that you have a reasonable level of certainty that you will close the round. By the time the campaign reaches the public, you want to have plenty committed, so that they can jump on the bandwagon rather than push start it! It's in doing this that Strabo managed to hit our target just 2 days after going public.

Finally, after going public you'll have to spend a significant amount of time speaking and engaging with investors. People will have all types of questions, and you'll have to be on hand to answer them quickly to strike while the iron is hot.

Approximate Crowdfunding Timeline

What to expect once your campaign is funded

Once you've successfully raised money through crowdfunding (congrats!), it's important to set expectations for how you will use the funds. This is one of the smaller aspects of how crowdfunding works for startups, but no less important. Be transparent about how you plan on using the money and how it will help your business grow. Additionally, make sure you keep your donors or investors updated on your progress and how their money is being used.

You will have had to submit a planned use of funds as part of your campaign, and investors will start to ask questions if this isn't being stuck to. It also compromises your ability to forecast for the future, and raise a future round.

If you are pre-launch, as Strabo was, you will also have to reallocate resources towards your impending launch and redirect all this new momentum towards that!

You will likely also have a list of investor perks that will have been promised to those who made investments of various sizes, so don't forget that these will have to be fulfilled.

Additional resources for entrepreneurs looking to crowdfund their business

As mentioned, the number one source of truth for this should be the platforms themselves. They have experience running thousands of campaigns, and they won't make a single penny unless your campaign is successful. So it's in their interest to make sure you're ready before going live, and you have everything you need.

We found SeedLegals to also be useful to get the necessary documents in place for the round, although this was more useful when having external investors participate who needed to be reconciled with the crowdfund.

SeedLegals and Hubspot also have lengthy blogs where they go into further details on some of the best platforms and tactics to use. Finally, go and speak to someone who has crowdfunded for their company! No better way of figuring out what it's like or whether it's right for you. It is no small undertaking, so be aware of the work that will be required.

Conclusion

And there it is! How crowdfunding works for startups! Having launched a successful crowdfunding campaign to complete our first fundraising round, we have some experience in this area, and wanted to put together a brief guide. If there's anything that you feel hasn't been covered or you'd like to have more clarity on, don't hesitate to reach out!

Ben Waterman

Written by Ben Waterman

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