Crowdfunding: how to fund your business idea
Crowdfunding is a way of financing your business through the donation of money from the public. This commonly occurs through crowdfunding websites.
Generally, you post your business idea as a campaign onto the website, with a description of your project. If people want to support your campaign, they can donate money to help you achieve your goal. On some websites, you need to set a monetary goal, and a time frame to reach this goal by.
To encourage people to support your campaign, you can offer incentives and rewards based on the amount they donate. These incentives and rewards can be anything, such as merchandise, acknowledgement, discounts on future purchase of the product you are developing, etc.
For example, you can set that for every donation of $10, you will acknowledge the donor on your product’s website. For every donation of $20, you will discount 5% off the purchase of your product.
Licenced companies may also act as crowdfunding platforms. To provide a crowdfunding service, eligible public companies must successfully apply to ASIC for an Australian Financial Services Licence to provide this service. You can find further information about crowdfunding platforms on the ASIC website.
Advantages of crowdfunding
The advantages of crowdfunding over other sources of funding can include:
- a customer base that believes in your product
- the opportunity for you to interact directly with your customers, who are also your investors
- the opportunity to get feedback from your customers while you develop and test your product
- free word-of-mouth marketing for your product through your backers
- instead of providing a share to investors, you still own your business in full
- lower commitment and risk (if you don't reach your goal, you don't have to commit).
Disadvantages of crowdfunding
As with all financing options, crowdfunding also has disadvantages. These can include:
- no guarantee that you will reach your funding goal in the set time
- the need to campaign and present your product well to encourage people to fund it
- the need to spend time interacting with your backers and providing them with updates on your product and business development
- providing rewards to your backers to encourage donations
- the need to deliver the product that has been promised to your backers
- having to compete with other businesses seeking crowdfunding for their ideas and products.
How do I start crowdfunding?
Here are some steps to follow if you would like to try crowdfunding for your business idea or product.
Planning is an important part of crowdfunding. Since you are trying to show people why they should support your product, you need to clearly show them:
- what the product is
- why they should fund your product
- the timeframe for developing your product if you reach your funding goals
- the incentives and rewards you will give them for funding your product.
Set your goals
You need to set goals so your backers will know what to expect. These goals include:
- how much funding you need
- the timeframe for your funding
- how long it will take to develop your business or product.
It is important to manage expectations, so your backers can track your progress. Some crowdfunding websites will not let you post your campaign unless you have a set funding goal and timeframe.
Choose where you would like to post your crowdfunding campaign
There are a number of crowdfunding websites that let you post your business proposal to attract backers. The websites differ in:
- the type of business ideas they will accept
- the people they reach
- their requirements (e.g. some will require you to raise funds within a set timeframe)
- their fees (some may have upfront fees, others only charge if you successfully raise the funds you set as your goal)
- how they can help to promote your idea.
You will need to do some research to find one that best suits your business needs.
Post your campaign
To attract backers, you should try to make your campaign stand out! You can achieve this by presenting your business idea in a unique way. If you need inspiration, look at successful campaigns to see what you can learn from them.
Interact with your audience
You can expand the reach and relevance of your campaign by interacting with your audience on channels such as social media. Keeping your backers informed about your progress will also increase the chances of them marketing your product to other people.
Thank your backers
Once you raise the funds you need, you should thank your backers and give them their incentives and rewards. You should also keep them in the loop as you implement your business idea, and maintain their interest in your product.
What happens if I don't reach my goal?
The terms and conditions of your crowdfunding campaign will vary depending on where you choose to post your campaign. Some websites will not allow you to access any funds you raise unless you reach your funding goal. Others will let you keep the funds you raise even if you don't reach your funding goal.
Read the terms and conditions of the crowdfunding site you choose carefully to find out what your options are.
What if I can't implement my business idea after I raise funds?
You are responsible for implementing your business idea once you raise the funds. If you are unable to implement your idea, you will need to figure out what to do with the funds you raise, which can include:
- offering refunds to your backers
- letting your backers know exactly how you will use the funds if you are unable to refund them
- offering other rewards to your backers.
You are also responsible for giving your backers any rewards you promise to them. If you are unable to do so, you need to refund their donation amount. Otherwise, they may be able to take legal action against you.
Legal issues for crowdfunding
You may need to register for licenses or meet legal terms and conditions depending on the type of business idea you are raising funds for. The same may apply to the type of rewards or incentives you intend to give your backers. This is especially the case where your business idea, or reward to your backers, is a financial product.