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A pandemic-fueled boom in crowdfunding has small businesses flocking to capital-raising platforms that experts say could help many companies get back to normal — as long as small-business owners are able to launch effective campaigns.
Regulation crowdfunding, in which companies raise capital from investors via government-monitored online platforms, has mushroomed in the last two years, going from approximately $100 million in 2019 to over $200 million in 2020, according to Chris Lustrino, founder and CEO of crowdfunding analytics and ratings firm KingsCrowd. It’s already exceeded the $200 million mark year to date in 2021, he adds.
“COVID has been a massive boon to this market,” Lustrino says.
When the pandemic disrupted traditional financing options, more small-business owners began looking for alternative funding sources; that made them more open to the ideas of crowdfunding and of capital as a commodity, he says.
More investors got comfortable with crowdfunding during the pandemic, too, he adds.
“There are so many angel investors and investors in general out there who had a lot of skepticism about putting [money] into private companies online,” Lustrino says. “But suddenly that was the only way they could do these deals. And so almost overnight there was this total buy-in from the retail investor market.”
Reopening and rebooting
Although crowdfunding is often associated with raising capital for new businesses, months of lockdowns and capacity restrictions have many small businesses exploring crowdfunding as a way to get back to normal operations, according to Sherwood Neiss, a principal at Crowdfund Capital Advisors.
“What we're seeing is a lot of these small restaurants, local parlors, beauty salons, that type of thing, that were struggling during the pandemic are now going up to the customers and saying, ‘Hey, I need $25,000, $50,000 to reopen, get us up and running,’” he says. “And the businesses are offering great yields, if you think about it. Many of them are 7%, 8%, 9%, which is a healthy yield for a short-term loan, and people don't have to pony up $25,000.” The average investment is about $700, he says.
Lustrino expects the interest in crowdfunding small-business reboots to have long-term effects on how businesses seek funding. “Once company founders and people who run small businesses see that this can actually work, I have a feeling they're going to double-dip, and they're going to come back, and they're going to continue to raise capital from the space,” he says.
3 keys to an effective crowdfunding campaign
Crowdfunding may not be a good fit for small-business owners who are strapped for time or energy. Small businesses launching recovery-oriented crowdfunding campaigns should keep three things in mind, according to the experts.
1. Find a good fit. A small business may have more success on a platform that aligns with its mission and goals. Some crowdfunding platforms cater to businesses in certain industries; others focus on geography or businesses of certain sizes. “Look at how much money their companies have raised or are raising right now so you can start to get a sense of how big their investor base might be,” Lustrino adds.
2. Don't skip the legal work. “This isn't people just giving money to support someone like they do on Kickstarter and GoFundMe,” Neiss says. “This is a highly regulated activity overseen" by the Securities and Exchange Commission and Financial Industry Regulatory Authority. "And so you have to file disclosures for investors.” Templates and boilerplate language can go a long way, but have a lawyer review the final documents, he adds.
3. Promote your campaign. “Campaigns that just go up there without any marketing behind them get zero. They just get zero traction,” Neiss says. “The people that put the effort in are the people that see the traction.”
Targeted social media efforts, email outreach and in-store promotions such as QR codes with campaign information are popular, according to the pros. “I've seen people do really creative things like have an ice cream social if they're an ice cream store and invite people in and then say, ‘By the way, you can actually invest in our company right now,’” Lustrino says. “They come in, they're super-psyched to be a part of this thing, then now maybe they're going to put in $500 more because they get really excited once they're there and they see what they're contributing to.”
Stories about raising money in the community and providing a potential financial return in exchange for getting a business back on its feet can be compelling features for businesses to promote to local media outlets, Lustrino adds. “Talk about a feel-good story,” he says.
This article was written by NerdWallet and was originally published by The Associated Press.