Crowdfunding 101: the basics for small businesses

Technology has had a huge impact on every aspect of our lives over the last decade or so – not least in the world of business. One of the biggest changes is the way it’s transforming traditional models of funding.

Old methods of raising money for a new business venture have been re-shaped, while we’ve seen whole new models spring up, thanks to tech. One of these new methods is crowdfunding. So what is crowdfunding, how does it work, and is it right for your small business? Here’s our take.

What is crowdfunding?

A quick definition of what we mean by crowdfunding first. Essentially, it is a simple way of using a technological platform to generate interest (and money) from a wide audience in order to raise funds.

The model works like this: you’ll set up a page online, and then ask for funding (usually in the form of small donations) to help you make your business dream a reality.

What do the crowdfunders get out of it?

Well, it depends on the kind of platform you’re using. Some crowdfunding platforms – including two of the most well-known, Kickstarter and GoFundMe, are for creative or charitable projects, rather than purely business ones.

In this case, the funding is often just a donation – they believe in what you’re trying to achieve and don’t expect any return. The kind of crowdfunding that is more relevant to small businesses is equity crowd funding. Some of the biggest sites offering this service are Crowdcube and Seedrs.

How does equity crowdfunding work?

It’s a simple model – in return for their donation, those who give money to your business receive equity in your company.

What are the pros and cons?

The initial start up costs for an equity crowdfunding campaign can stretch into the thousands, so it is vital that you’re sure that it is the best use of your time and money.

Crowdfunding is a potentially great route to finding the financial boost your company needs, but it does take a lot of investment to encourage others to invest in you. You will need to spend time and money on an effective social media and marketing campaign to support your crowdfunding effort.

And as for your investors – well, they will only see a return on their investment if you go public or sell the business, so there is risk involved for them too.

Is it right for me and my small business?

Only you can really answer this. But, if you feel like you have a compelling story to tell about your business that you think other people will want to get behind, then crowdfunding can be a great way to generate interest and cash.

Again, like so many business decisions, it comes down to where the best value lies. Think of it as investment that you are making in your business (rather than one that other people are making in it).

Taking that approach should help you to decide whether crowdfunding offers your business the best value. It may be that a more traditional approach – for example a strategic relationship with an experienced business ‘angel’ who can give advice as well as money, may be more valuable.