Crowdfunding is a method of raising capital through the collective effort of friends, family, customers, and individual investors. This approach taps into the collective efforts of a large pool of individuals—primarily online via social media and crowdfunding platforms—and leverages their networks for greater reach and exposure.

For small businesses, crowdfunding is a modern solution to the age-old problem of securing necessary funding. It provides an alternative to traditional forms of investment and offers a unique set of advantages and challenges. This glossary will delve into the key terms and concepts related to crowdfunding in the context of small business operations.

Types of Crowdfunding

There are several types of crowdfunding, each with its own unique characteristics and requirements. Understanding these types is crucial for small businesses considering this funding method.

It's important to note that the choice of crowdfunding type can significantly impact the business's obligations to its backers, the potential legal implications, and the overall success of the campaign.

Donation-Based Crowdfunding

Donation-based crowdfunding is a way to source money for a project by asking a large number of contributors to donate a small amount to it. In return, the backers may receive token rewards that increase in prestige for higher donations.

This type of crowdfunding is popular for charitable causes and creative projects. However, it's less commonly used for small business financing due to the lack of financial return to the contributors.

Reward-Based Crowdfunding

Reward-based crowdfunding involves individuals contributing to your business in exchange for a “reward,” typically a form of the product or service your company offers. This type of crowdfunding is popular with startups and small businesses that are product or service-based.

One of the key benefits of reward-based crowdfunding is that it allows businesses to validate their idea before fully launching. It also helps to build a customer base and generate buzz around the product or service.

Key Crowdfunding Platforms

There are numerous crowdfunding platforms available, each with its own unique focus and features. The choice of platform can significantly impact the success of a crowdfunding campaign.

It's important for small businesses to carefully consider their choice of platform, taking into account factors such as the platform's reputation, its user base, and the fees it charges.

Kickstarter

Kickstarter is one of the most well-known crowdfunding platforms. It's a reward-based platform that focuses on creative projects. Kickstarter has a large and active user base, which can be a significant advantage for businesses looking to reach a wide audience.

However, Kickstarter operates on an all-or-nothing funding model, meaning that if a project doesn't reach its funding goal, the project creator doesn't receive any funds.

Indiegogo

Indiegogo is another popular crowdfunding platform. Unlike Kickstarter, Indiegogo allows for a wider range of projects, including charity, personal finance, and small business. It also offers more flexible funding options, including both fixed and flexible funding.

Fixed funding works like Kickstarter's model, where funds are only received if the goal is met. Flexible funding allows creators to keep the funds they raised, regardless of whether they meet their goal.

Legal Considerations

While crowdfunding offers many benefits, it's not without its legal considerations. These can vary depending on the type of crowdfunding, the platform used, and the specifics of the campaign.

It's crucial for small businesses to be aware of these considerations and to seek legal advice if necessary. This can help to avoid potential issues down the line and ensure that the campaign is conducted in a legal and ethical manner.

Intellectual Property

One of the main legal considerations for crowdfunding is intellectual property (IP) protection. When launching a crowdfunding campaign, businesses often need to share details about their product or service. This can potentially expose them to IP theft if they haven't taken the necessary steps to protect their ideas.

Before launching a crowdfunding campaign, businesses should consider applying for patents, trademarks, or copyrights as appropriate. They should also be careful about the amount of detail they share in their campaign.

Securities Laws

For equity-based crowdfunding, securities laws are a major consideration. These laws regulate the offer and sale of securities to protect investors. Non-compliance can result in severe penalties, including fines and imprisonment.

Businesses considering equity-based crowdfunding should consult with a legal professional to ensure they comply with all relevant securities laws. This includes understanding the requirements for investor disclosure, reporting, and compliance.

Planning a Successful Campaign

Running a successful crowdfunding campaign requires careful planning and execution. From setting a realistic funding goal to creating a compelling campaign page, there are many factors to consider.

Understanding these factors can help small businesses to maximize their chances of success and make the most of the opportunities that crowdfunding offers.

Setting a Funding Goal

Setting a realistic funding goal is one of the most critical aspects of a crowdfunding campaign. The goal should be high enough to cover the necessary costs but not so high that it discourages potential backers.

When setting a funding goal, businesses should consider factors such as the cost of producing their product or service, the cost of fulfilling rewards, and the fees charged by the crowdfunding platform.

Creating a Compelling Campaign

A compelling campaign is key to attracting backers. This includes a clear and engaging description of the product or service, compelling images or videos, and attractive rewards for backers.

Businesses should also consider how they will promote their campaign. This could include social media marketing, email marketing, and public relations.

Post-Campaign Considerations

Once a crowdfunding campaign has ended, there are still several considerations for businesses. These include fulfilling rewards, maintaining communication with backers, and managing the funds raised.

By carefully managing these post-campaign tasks, businesses can maintain their reputation, build long-term relationships with their backers, and set the foundation for future success.

Fulfilling Rewards

Fulfilling rewards is one of the main post-campaign tasks. Businesses need to ensure that they deliver on their promises to backers. This includes delivering the promised rewards on time and to the expected quality.

Failure to fulfill rewards can damage a business's reputation and potentially lead to legal issues. Therefore, it's crucial to plan for reward fulfillment from the start of the campaign.

Managing Funds

Managing the funds raised from a crowdfunding campaign is another important consideration. Businesses need to ensure that they use the funds as promised and that they manage them in a responsible and transparent manner.

This includes keeping accurate records of how the funds are used, and providing updates to backers about the progress of the project. This can help to build trust with backers and demonstrate that their contributions are being used effectively.