There’s an unmistakable trend, more and more entrepreneurs and small business owners are turning to crowdfunding to start or grow their businesses. But when we speak with small businesses around the country we still hear a lot of confusion and misconceptions about crowdfunding how crowdfunding works.
Let’s dispel a few of these common crowdfunding myths:
1. Crowdfunding is just “Digital Panhandling”
This misconception most often comes from the confusion about the various types of crowdfunding. In broad strokes, there are 3 types of crowdfunding:
Gift Crowdfunding
Also called donation crowdfunding, refers to making a donation to someone’s business, project, or cause with no expectation of any return. This is more often used for non-profit organizations but sometimes businesses facing an emergency will pursue this type of crowdfunding. GoFundMe is the most popular donation crowdfunding website.
Reward Crowdfunding
Refers to making a contribution to a crowdfunding campaign in exchange for prepaid products or services, swag, or some other tangible benefit. Kickstarter is the most well-known reward crowdfunding site.
Investment Crowdfunding
Refers to make a financial investment in a small business or start-up. These investments are further broken into debt or equity crowdfunding campaigns. This is the fastest-growing type of crowdfunding for small businesses. Honeycomb is a debt-crowdfunding website.
When a successful business uses gift crowdfunding to fund a growth project, it creates questions around why a growing business is turning to donations and can create some backlash. This is also true for reward crowdfunding if the rewards are not carefully thought out. Investment crowdfunding solves this problem, by offering your contributors a healthy financial return based on your success, you aren’t asking for donations, you are giving your biggest fans a chance to come along on your journey.
The key to avoiding ‘digital panhandling’ is to make sure you are picking the right type of crowdfunding for your business. If you run a young small business, need a modest amount of capital, and are recovering from a disaster or setback then gift crowdfunding is probably the right path for you. If your business is well established or on a strong growth trajectory, you should most likely be thinking about investment crowdfunding.
2. If You Build It, They Will Come
One of the biggest misconceptions of crowdfunding is that you simply need to launch a campaign, and the money will come pouring in. The reality is, the most successful campaigns include a lot of planning and careful execution during the life of the campaign.
The reason is simple, people believe in you and your business but before anyone contributes to your campaign, two things must happen:
i) They must know that your campaign even exists! A marketing plan needs to be in place to effectively tell your network that you are running a campaign.
ii) They need to understand and approve of your project. This means you’ll want to invest the time and energy to make a great campaign page with a compelling and relatable story. Make it clear not just how the project will make your life better, but how the project will improve your customers’ experience.
Running a successful crowdfunding campaign is part art and part science, building and executing on a crowdfunding plan is critical to your success.
3. Crowdfunding is only for new businesses
It is true that many startup small businesses do leverage crowdfunding as a tool to bring on early-stage capital to help them get started. However, it is increasingly common to see well-established businesses turning to crowdfunding as a way to both attract fair capital and to engage their customers and fans on a deeper level.
At Honeycomb, we have businesses on the platform with less than 1 year of operating history side-by-side with businesses who have been around for 10+ years. When thinking about crowdfunding, the age of your business is less important than understanding your network and your crowdfunding strategy.
4. “I Don’t Have Time for Crowdfunding”
In some ways, this misconception is the inverse of #2 above. When we hear this concern, it generally comes in two forms - sometimes business owners are concerned that a crowdfunding campaign is too slow to meet a pressing capital need, while other business owners are worried that running a campaign will take too much time and energy.
In terms of the length of the campaign, it is true that some crowdfunding campaigns can last 180 days or more, but the majority of campaigns are 90 days or less. We have even found that shorter campaigns help to create urgency - both for you and your potential contributors - reducing the instinct to procrastinate. Most campaigns on Honeycomb are 45-60 days in length and funds can be available in as little as 3 weeks!
With respect to a campaign taking too much time and energy, we find that the most successful business owners on Honeycomb dedicate roughly 4-5 hours per week. And many of them find that the work they are doing is actually helping them to create fresh and engaging social media and email content and giving them an opportunity to connect with their customers on a whole new level by getting those customers emotionally, and in some cases, financially invested in their upcoming project. This brings us to our next misconception…
5. The Crowdfunding Campaign Ends when the Timer Stops
One of the biggest misconceptions we see is that businesses don’t fully appreciate the long term marketing and engagement that comes with running a crowdfunding campaign. When individuals contribute to your campaign, they now have an emotional stake in your business’s project. This is a captive audience who wants to see you succeed. Furthermore, if you run an investment crowdfunding campaign, this audience is now literally invested in your financial success.
Remember, many campaigns include perks, particularly for reward crowdfunding. Your contributors put their faith in you, so it is critical to fulfilling those perks in a timely manner. Fulfilling those perks represents a huge opportunity to tap into your most loyal customers and fans, and encourage them to get the word out about your business and to shop with you more often.
We also encourage crowdfunding businesses to surprise and delight their campaign contributors with updates and even consider unannounced benefits such as a one-time coupon code or a special event limited to your contributors.
If you treat your contributors right, your business will have a new booster for life!
6. You Need Rich Friends to Crowdfund
We often hear from business owners that they can’t crowdfund because they don’t have rich friends. But, that’s the whole point of crowdfunding!
We get it, some business owners are able to turn to friends and family for financial support, but we know that many more do not have that luxury. Crowdfunding was designed to be a democratic way to aggregate relatively small amounts of money from a large group of people.
A successful crowdfunding campaign is all about finding ways to activate your existing network and to build on that success to attract new people to your project.
7. Crowdfunding is Expensive
Good business owners are smart with their money. It is important to understand that crowdfunding costs vary widely across different platforms and different types of crowdfunding. Most platforms will charge a fee, generally between 6% and 10% of the total funds you raised. But it is also important to remember that reward crowdfunding comes with the cost of fulfilling your reward which in addition to the direct financial costs of shipping products, can also cost a lot of your time and energy and distract you from the project you just raised funds for.
Equity crowdfunding means you are selling a piece of your company and that your contributors could be entitled to a portion of your profits going forward. And of course, debt crowdfunding is a loan complete with ongoing payments. For context, Honeycomb rates are generally between 6% and 14%, highly competitive with bank loans, and generally much more affordable than credit cards or other online lenders.
Crowdfunding costs vary widely from website to website and can come with the unexpected costs of fulfilling rewards or perks. But, with some simple research ahead of your campaign, crowdfunding can be a great bargain!
Still looking for more?
If you want more information about getting financing for your small business, check out the Honeycomb Ultimate Guide to Getting a Small Business Loan.
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