You've probably heard about the growing trend of "crowdfunding." What exactly is it and could it work for your small business? In the SCORE podcast on Crowdfunding, Maryann O'Neil and John Montelione demystify this popular form of alternative financing. They are the co-founders of a crowdfunding website called MsGenuity which raises funds for startups owned by mom entrepreneurs or "mompreneurs." The new financing landscape can be treacherous, so John and Maryann explain how to find your path to success.

What is crowdfunding?

Simply put, it is the funding of a business or project by raising money from a large number of people usually via the internet. Individuals can commit as little as $5 and receive a reward for their contribution. Kickstarter and Indiegogo are popular options, but the list of crowdfunding websites grows every day.

The two types of crowdfunding are:

  • Reward-based crowdfunding: A person contributes money and receives a reward in exchange. The reward could be the product they are funding, a t-shirt, a thank you on social media, etc. depending on the amount given.
  • Equity-based crowdfunding: A person contributes to become an investor of the business.

Crowdfunding means that a rejected bank loan application is not the end of the road. An entrepreneur has another chance for financing. However, Maryann and John warn that only about a third of crowdfunding efforts reach their goals.

Why is crowdfunding popular now?

Traditional crowdfunding is not new. People have fundraised for projects, but the internet reaches a much larger pool of potential donors.

Also, the government changed business financing options. The great recession and unemployment rates pushed the government to pass the Jobs Act of 2012. The new law relaxes capital investment regulations. Now, entrepreneurs can raise money from non-accredited individuals, those who earn less than $200,000 a year. John explains this change is "revolutionary."

How to create a lucrative crowdfunding campaign

Before posting your project on a crowdfunding site, Maryann and John insist on a 90 day preparation period. This time allows for the following tasks:

  • Protect your idea. Once you put your project online, the possibility of intellectual property theft rises. Get the necessary patents or trademarks beforehand.
  • Develop your team. Ask family, friends, neighbors and other real people for their honest feedback on your project before releasing it to virtual contributors. They will help you sort out the details and possibly offer new ideas. Your team will consist of your earliest supporters, donors, marketers and of course, cheerleaders.
  • Research.  Find an appropriate crowdfunding platform. Kickstarter and Indiegogo are general sites, but hundreds of more specific platforms might help showcase your product to your target audience.
  • Pricing strategy. Why are you raising this money? Be specific about your goals. Is it for product design, manufacturing, or marketing?
  • Market. Maryann and John say to put aside 10% of the money you hope to raise toward your marketing plan. A video is often a critical part of your marketing strategy. You can show your passion for your business and emphasize why the viewer needs your product.
  • Create reward strategy. What rewards would be appealing to the contributor? Develop levels of rewards depending on the amount individuals give.

During the campaign, don't plan on sitting back and relaxing—keep marketing! You might see an initial surge in contributions, but often you'll hit a slump in the middle of the campaign. Stay on social media and ask friends to spread the word.

Whether you reach your goal or not, thank your supporters and send their rewards at the end of your campaign. Keep them updated about your growth and setbacks. You have built an audience who believe in you and your small business.

Watch the entire Crowdfunding podcast and read our resources online. Crowdfunding seems like the perfect answer for the small business owner, but it's not a guarantee. A SCORE mentor can help you sort through the financing options, so you can decide what's best for your small business.