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In the last few years, crowdfunding websites and social apps like GoFundMe or Kickstarter have emerged as primary platforms for small businesses hoping to raise money and awareness for their business. Using the expansiveness of your virtual network, these and other crowdfunding sites allow you to extend investor and consumer recruitment across the globe without ever paying for ad space. Follow this guide for the ins and outs of obtaining crowdfunding for your small business.
What is Crowdfunding in Business?
Crowdfunding, as the name suggests, is a method of business financing that relies on donations from interested individuals across the world, rather than traditional forms of equity and debt financing. Equity financing offers investors a stake in your business in return for their upfront investment and debt financing provides upfront capital in return for future interest payments. Crowdfunding, on the other hand, allows you to exchange your own services or personal gifts for early investment in your small business.
Instead of splitting control of your company with investors, or entering into long term contracts with traditional lenders, you may, through crowdfunding, garner investment capital by offering discounts on popular services, free merchandise, or something as simple as a handwritten card.
For those starting a business, crowdfunding provides a low-cost method of reaching out to investors, as well as a growing social media platform for brand profiles and promotion. Depending on the essentials of your business, one of several crowdfunding options may fit your needs.
How Does Crowdfunding Work?
Crowdfunding generally begins within your own social media circles, but can quickly expand if marketed correctly. Typically, business owners seeking crowdfunding will create a profile on a crowdfunding platform that not only advertises their business but sets a goal for fundraising and explains their needs in detail.
For example, you might create a profile on Indiegogo to attract investors for your Cross Fit Gym. Here, you could explain that you opened just before the pandemic, and hope to raise $15,000 to cover the next three months’ rent. As your listing gets shared on social platforms by friends and family, and as it circulates on the crowdfunding site, more and more users will not only be presented with the opportunity to invest but to become familiar with your brand.
Types of Crowdfunding Campaigns
Crowdfunding provides small businesses with a number of advantages compared with traditional investment or alternative financing options. However, the particularities of your operation and your expected path forward impact which crowdfunding options are best suited for you and your investors.
There are four main types of crowdfunding, each of which provides different perks for owners and investors. Rewards-based crowdfunding, equity crowdfunding, donation crowdfunding, and peer-to-peer lending are all viable forms of crowdfunding, each fit for different fundraising needs.
Rewards-Based Crowdfunding is a common avenue for small businesses that hope to kickstart growth without committing to debt financing or giving up ownership to shareholders. Under this format, investors are “rewarded” for their investment in a business by receiving some sort of gift for their donation, with the reward typically increasing with the size of the donation.
For example, a $25 donation may earn investors a free virtual fitness training session, while a $500 donation could result in a gift of company merchandise plus a one-year membership for online classes. Rewards-based crowdfunding is particularly effective for owners that hope to grow their business without dealing with shareholder control or loan repayments and is especially effective for those that hope to promote their business and attract investors without costing their business significantly.
Equity crowdfunding, in contrast to Reward-Based efforts, is a good fit for small business owners with a defined growth plan, and confidence in their ability to sustain profits. Like equity financing, equity crowdfunding offers investors a stake in a business, in exchange for a cash contribution to the firm. Equity financing typically involves so-called Angel Investors who purchase large quantities of stock in your company in exchange for a significant say in its operations. Conversely, equity crowdfunding allows you to reach out to a global audience of small-dollar investors with a single post. These “small fish” can offer their financial support for your growing brand, but may not expect the full extent of privileges offered to traditional investors.
Equity Crowdfunding provides owners with upfront financing without adding to their owed debts. However, it does require their accountability to shareholders going forward. Further, as the shareholders in your company increase in number, your business will be under greater pressure from investors and regulators to maintain your obligations. Pursue equity crowdfunding if you have a defined plan for the future, and are willing to take in outside investors.
Donation Crowdfunding is the most straightforward form of crowdfunding, and simply refers to crowdfunding efforts driven by a large number of individual donors from across the globe. These investors may contribute any amount of money, and don’t necessarily receive any product or service in return. With a strong social media presence and a large virtual network, donation crowdfunding campaigns can go a long way to increase your fundraising and brand awareness. Donation crowdfunding is also a primary tool for those hoping to raise money for charitable causes, social impact initiatives or other world-changing ideas.
If you have the confidence to pursue equity-based crowdfunding, but don’t want to bring shareholders into your company, debt crowdfunding may be a suitable option. Debt crowdfunding, and specifically peer-to-peer crowdfunding, allows individuals to invest in your business without going through a middleman. Debt crowdfunding typically involves making interest payments on loans from investors; however, the terms of your agreement are likely to be more flexible and favorable than they would be if you’d accepted a traditional bank loan.
The 5 Best Crowdfunding Websites
Just as each small business may require a different method of crowdfunding, various crowdfunding websites and apps each have their own strengths and may suit some businesses better than others.
Kickstarter is a popular reward-based crowdfunding platform where individuals or businesses can raise funds for creative projects, innovative products, or artistic ventures.
Indiegogo is another well-known crowdfunding platform that supports various types of campaigns, including creative projects, entrepreneurial ventures, and social causes.
GoFundMe is primarily used for personal fundraising or supporting charitable causes, allowing individuals to raise money for personal needs, medical expenses, educational goals, and more.
SeedInvest is an equity-based crowdfunding platform that connects accredited investors with startups and early-stage companies seeking funding in exchange for equity.
Patreon is a membership-based crowdfunding platform that allows creators, artists, musicians, and other content creators to receive ongoing support from their fans in exchange for exclusive content or perks.
Peer lenders, in return, are given access to a marketplace where they can independently choose which businesses to invest in for financial gain, still from the comfort of their own home.
Crowdfunding can be a complicated process, but if you pursue the correct donation process, choose the right service and use your social media brand to your advantage, there are some significant benefits to crowdfunding versus other forms of financing, especially for young startups.
1. Raises Capital Without Interest
Crowdfunding, for one, allows your business to raise capital without the burden of interest payments. Aside from peer-to-peer lending, Crowdfunding options give your small business a valuable chance to grow your operation without taking on debt.
2. Allows for Market Validation
Aside from fundraising, Crowdfunding apps and websites can give your business a vital platform for Market Validation, without wasting capital. Rather than spending money on focus groups and market research, you may be able to gauge consumer interest and predict future growth by operating a well-organized Crowdfunding profile.
3. Attracts Potential Customer Base
Within your efforts to attract investors and gauge interest in your business, it’s very possible that your Crowdfunding efforts may help attract loyal customers to your brand. If your product, service, or initiative is well-represented, if you argue your case to investors and consumers alike on Crowdfunding sites, the options above can be both a vital source of financing and a valuable platform for advertising your product and getting in touch with consumers.
While crowdfunding offers numerous benefits, it also has its share of disadvantages that entrepreneurs should consider:
- Limited control
- When you opt for crowdfunding, you are essentially involving a large number of investors in your business. This means you may have less control over decision-making and may need to keep your investors updated on the progress of your venture.
- High competition: Crowdfunding platforms host a vast number of campaigns, making it challenging to stand out and capture the attention of potential backers. You’ll need to put in significant effort to create a compelling campaign and effectively market it to gain traction.
- Time-consuming: Running a crowdfunding campaign requires significant time and effort. From planning and creating the campaign to managing rewards, responding to inquiries, and promoting your campaign, it can become a full-time job, diverting your attention from other business activities.
- All-or-nothing funding: Some crowdfunding platforms operate on an all-or-nothing model, meaning you must meet your funding goal to receive any funds at all. If you fall short of your target, you won’t receive any money, even if you raise a substantial amount.
Frequently Asked Questions About Crowdfunding
- Access to capital: Crowdfunding provides a platform to raise funds from a large pool of investors, increasing the chances of securing capital for your business idea or project.
- Market validation: A successful crowdfunding campaign can serve as proof of concept and validate market demand for your product or service, attracting potential customers and investors.
- Marketing and exposure: Crowdfunding campaigns often generate publicity and media coverage, giving your business valuable exposure and helping build brand awareness.
- High competition: Crowdfunding platforms are highly competitive, and standing out among thousands of campaigns can be challenging, requiring a well-planned and executed marketing strategy.
- Time and effort: Running a crowdfunding campaign requires significant time, effort, and resources to create compelling content, manage rewards, and promote the campaign actively.
In most cases, crowdfunding does not require repayment in the traditional sense. Depending on the type of crowdfunding, such as donation-based or reward-based, contributors typically do not expect repayment. However, it’s important to fulfill any promises made to backers, such as delivering rewards or perks according to the terms outlined in your campaign.
For equity-based crowdfunding, where backers receive equity or shares in your business, they become stakeholders and may benefit financially if your business succeeds. In such cases, you don’t need to repay the invested amount but should ensure transparency, regular updates, and potential dividends or exit opportunities for your investors.
Yes, crowdfunding is legal in the United States. However, it is subject to regulations and compliance requirements set by the Securities and Exchange Commission (SEC). The specific regulations depend on the type of crowdfunding, such as rewards-based, donation-based, or equity-based crowdfunding.