Not sure how to bankroll your next business idea? Crowdfunding is a worthwhile option for the self-employed to explore. Read on to learn about what it is and how to use crowdfunding sites to take your business to the next level.
What is crowdfunding?
Crowdfunding is a fundraising strategy in which you raise money from a large number of donors over the internet. The approach can be used to fund projects ranging from the personal to the entrepreneurial. It has caught on among the self-employed as an easy and effective means to launch or expand a business.
In exchange for their donations, donors can receive rewards or equity in your business. For rewards-based crowdfunding, donors usually receive products or services. An equity-based crowdfunding scheme involves donors receiving shares in the business.
The main advantages of crowdfunding for the self-employed are:
- You don’t need a large lender or a hard-to-come-by grant to finance your business dreams. That means that you don’t have to worry about a stringent loan or grant approval process.
- You can quickly receive small donations from people across the internet through a crowdfunding website. Your reach will be far wider than an entrepreneur trying to obtain funding through traditional means.
- Starting a crowdfunding campaign allows you to boost your visibility on the web and grow your consumer base.
What are some crowdfunding sites?
Below are some popular crowdfunding sites for the self-employed:
- Kickstarter: This popular rewards-based crowdfunding platform has been used to successfully fund the development of numerous new products. Product niches range from technology to the arts.
- RocketHub: You can use this rewards-based crowdfunding platform to raise funds in a wide array of niches such as science and education.
- Fundable: This flexible crowdfunding site geared specifically toward small business owners lets you choose between rewards- or equity-based crowdfunding.
- Indiegogo: This site was the first major crowdfunding platform, and it has raised over $1 billion since its inception in 2007. Indeigogo offers a “flexible funding” option that allows you to collect all your donations even if you don’t reach your goal. There’s also an equity investment option offered in partnership with MicroVentures.
- CircleUp: An equity-based crowdfunding company, headquartered in San Francisco, designed to help emerging brands raise capital and grow their business. In order to apply, most companies must show revenue of at least $1 million, although CircleUp has made exceptions for promising companies with revenue in the $500,000 range. The company offers no-cost escrow services, and it takes a percentage of the raise in commission.
How do I start crowdfunding my business?
Take these steps to start crowdfunding your business.
1. Choose an incentive type. Decide whether you prefer a rewards- or equity-based crowdfunding approach. Keep in mind that your choice may limit which crowdfunding website you can use.
2. Pick a crowdfunding platform. Select the crowdfunding site you want to use to operate your crowdfunding campaign and receive donations. Be sure to factor in the fees the website collects from your funding and any fees imposed if you don’t meet your funding goal.
3. Start a campaign. Use the crowdfunding website you chose to start a new crowdfunding campaign. If the website allows you to choose between rewards or equity, be sure to select the incentive system that meets your needs.
4. Set a funding goal. How much do you hope to raise and by when? Establish a goal amount and target date. But be sure it’s a realistic one.
5. Make the campaign live. Publish your campaign to the web to set the donation process in motion.
6. Spread the word. Your crowdfunding campaign will usually come with a shareable link. Be sure to share it via social media and e-mail to reach as many potential donors as possible.
Successful examples of small business crowdfunding
Here are a few of many small businesses that have gotten their ideas off the ground through crowdfunding:
- Bitvore: Their data monitoring and analysis product raised $4.5 million via an equity-based Fundable campaign.
- Oculus: Oculus’ virtual-reality headset, the Oculus VR, garnered over $2.4 million in 30 days through a Kickstarter campaign. Oculus was eventually acquired by Facebook for $2 billion.
- Bragi: Their multipurpose music player and fitness tracker, The Dash, raised $3.39 million in 50 days through a Kickstarter rewards-based crowdfunding campaign.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.