Crowdfunding: A New Way to Raise Capital for Your Business

In recent years, crowdfunding has emerged as a popular alternative to traditional funding methods for businesses, entrepreneurs, and creatives. Crowdfunding platforms have made it possible for individuals and organizations to raise funds from a large number of people, typically through online platforms.

What is Crowdfunding?

Crowdfunding is the process of raising small amounts of money from a large number of people, typically through an online platform. This approach allows entrepreneurs to bypass traditional funding sources, such as banks and venture capitalists, and connect directly with potential investors.

It is the practice of funding a project, business, or cause by collecting small amounts of money from a large number of people, typically through an online platform. This approach allows individuals, organizations, and communities to come together to support a common goal or project.

It also involves a decentralized funding model, where many individuals contribute small amounts of money to support a project. Each backer contributes a relatively small amount of money, which is pooled together to reach the funding goal. The campaigns are typically hosted on online platforms, which provide a space for project creators to showcase their projects and connect with potential backers.

The crowdfunding process typically involves a project creator developing an idea for a project or business, creating a pitch or proposal, and launching a campaign on a crowdfunding platform. Potential backers discover the campaign and contribute funds, which are collected and managed by the platform.

Key Characteristics of Crowdfunding

1. Decentralized funding: Crowdfunding allows entrepreneurs to raise funds from a large number of people, rather than relying on a single investor or institution.
2. Online platforms: Crowdfunding campaigns are typically hosted on online platforms, which provide a space for entrepreneurs to showcase their projects and pitch their ideas to potential investors.
3. Small contributions: Crowdfunding campaigns typically involve small contributions from a large number of people, rather than large contributions from a few investors.

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Types of Crowdfunding

There are several types of crowdfunding, each with its own unique characteristics and benefits.

1. Reward-based : Backers receive rewards, such as products or services, in exchange for their funding. This type of crowdfunding is commonly used for creative projects, such as films, music, and art.
2. Equity-based: Backers receive equity in the company in exchange for their funding. This type of crowdfunding is commonly used for startups and small businesses.
3. Donation-based : Backers donate funds to support a project or cause without receiving rewards or equity. This type of crowdfunding is commonly used for charitable causes and social projects.
4. Lending-based : Backers lend funds to entrepreneurs, who repay the loan with interest. This type of crowdfunding is commonly used for small businesses and startups.

Benefits of Crowdfunding

It offers several benefits for entrepreneurs, including:

1. Access to funding: Crowdfunding provides an alternative source of funding for entrepreneurs who may not have access to traditional funding sources.
2. Marketing and promotion: Crowdfunding campaigns can help entrepreneurs build buzz and generate interest in their projects.
3. Community engagement: Crowdfunding allows entrepreneurs to connect with potential customers and build a community around their project.
4. Validation: Crowdfunding can provide validation for entrepreneurs, helping them determine whether their project has market demand.

Successful Crowdfunding Campaigns

Crowdfunding has been used to fund a wide range of successful projects, including:

1. Pebble Watch: The Pebble Watch, a smartwatch that raised over $10 million on Kickstarter.
2. Oculus Rift: The Oculus Rift, a virtual reality headset that raised over $2 million on Kickstarter.
3. Veronica Mars Movie: The Veronica Mars movie, which raised over $5 million on Kickstarter.

Tips for a Successful Crowdfunding Campaign

1. Create a compelling pitch: Develop a clear and concise pitch that showcases your project and its benefits.
2. Set realistic goals: Set achievable funding goals and timelines.
3. Build a community: Engage with potential backers and build a community around your project.
4. Offer rewards: Offer rewards that are appealing to potential backers.
5. Promote your campaign: Promote your campaign through social media, email marketing, and other channels.

As crowdfunding continues to grow and evolve, we can expect to see new platforms, models, and innovations emerge. Some potential trends and developments include:

1. Increased regulation: As crowdfunding grows, we can expect to see increased regulation and oversight from government agencies.
2. More specialized platforms: We may see the emergence of more specialized crowdfunding platforms, focused on specific industries or types of projects.
3. Greater use of blockchain technology: Blockchain technology has the potential to increase transparency and security in crowdfunding transactions.
4. More emphasis on social impact: Crowdfunding may increasingly be used to support social and environmental causes, as well as commercial projects.

Challenges and Limitations of Crowdfunding

While crowdfunding has many benefits, it also has some challenges and limitations. These include:

1. Competition for funding: With so many projects competing for funding, it can be difficult to stand out and attract backers.
2. Risk of failure: Crowdfunding projects can fail to meet their funding goals, or fail to deliver on their promises.
3. Regulatory uncertainty: The regulatory environment for crowdfunding is still evolving, and can be unclear or inconsistent.
4. Fees and costs: Crowdfunding platforms often charge fees and costs, which can eat into the funds raised.

Crowdfunding sites

To help you select the one that’s right for you, here are 7 sites you should know about in order to turn your dreams into reality

01. Kickstarter

Our first site is possibly the most popular name that comes to mind in the world of crowdfunding platforms: Kickstarter. Their mission is to help bring creative projects to life. As of 2019, Kickstarter has funded 445,000 projects in the music, art and tech field.

02. Indigogo

Indigogo was founded in 2008 when owners, Danae Ringelmann, Slava Rubin and Eric Schell faced a similar issue of trying to raise funds to make their own ideas come to life. This site enables millions of people to launch groundbreaking products as well as help surface innovations in tech and design.

03. GoFundMe

While GoFundMe is more geared towards social fundraising, personal causes or emergencies, businesses can use it as well. Majority of the campaigns on this platform are for people in need after illness or to help victims of natural disasters. Therefore, the donors of this platform tend to give to causes that come from within their personal network or social circles.

04. Patreon

Here’s a platform that works a little differently. Patreon allows donors to submit monthly contributions. Making this platform an excellent choice for any creatives who produce and release continuous content (think of podcasts or YouTube channels).

05. Fundly

‘Raise money for anything’ is Fundly’s motto. You can use this platform to raise money for anything from personal health to special events. To get started, create your campaign page (and update it throughout), manage it through the Fundly app and harness the power of Fundly’s Facebook OpenGraph integration to spread your campaign far and wide.

06. LendingClub

LendingClub is on a mission to transform the banking system in order to make credit more affordable (and investing more rewarding). Since 2007, they have helped three million people achieve financial wellness. This platform is what’s known as ‘peer-to-peer’ lending. You can apply for a loan for personal, medical and business needs. All you have to do is sign up, choose a loan offer that includes customized rates, terms and payment options (your loan options are based on what you intend to use the money for).

07. CircleUp

If you’re past the developmental stage and looking to scale up your flourishing business, then CircleUp is your solution. This site aims to create a transparent and efficient market to drive the innovation of consumer brands. Plus, they boast an industry wide network and partnerships with brands like Amazon.

08. Fundable 

Fundable is part of the Startups.com platform and is among the top crowdfunding sites for US startups to exchange rewards, including equity, for funding.

The platform offers self-managed fundraising and options for campaign support—Fundable will help you create a pitch deck and identify prospective investors. You can also use it to organize fundraising activities and track investor interest.

According to Fundable, startups that offer rewards typically raise fewer funds but get more backers. Meanwhile, equity crowdfunding usually raises more capital from fewer investors.

To succeed with equity crowdfunding, you must provide all the background materials accredited investors expect, including a record of growth, a pitch deck, and a solid business plan.

Fees: $179 per month, with no success fees. 

Pros:

• Flexibility to offer rewards or equity
• Built-in campaign support 
• Startup- and small business-friendly

Cons:

• High monthly fee
• Complex signup requirements
• Equity crowdfunding requires extensive financial disclosure 

Crowdcube

Business owners outside the US should check the terms and conditions of the crowdfunding platforms listed so far to ensure they qualify to use all their features.

Unlike the sites above, Crowdcube is a UK-based equity crowdfunding platform built for European businesses. You can set up several types of equity crowdfunding using Crowdcube, including private and follow-up rounds.

Like Fundable, Crowdcube supports common tasks such as managing follow-up rounds and distributing dividends.

Crowdcube hosts relatively few campaigns. Still, companies that are approved and succeed with their fundraising goals on the platform can join Crowdcube’s Funded Club, enjoying exclusive benefits from partner organizations.

Promote your pitch to solicit investors from your network or to appeal to Crowdcube’s established community.

Fees: 7% of the amount successfully raised, plus a 0.75% to 1.5% completion fee and payment processing fees of up to 2.9%.

Pros:

• Created for European businesses
• Different types of equity crowdfunding allowed
• Exclusive benefits for successful campaigns

Cons:

• 7% fee plus other charges
• Unsuitable for businesses outside Europe
• Relatively few campaigns

Mightycause 

Since its inception in 2006, Mightycause campaigners have raised more than $600 million for nonprofit causes.

Instead of a centralized platform, Mightycause offers tools and features you can use on your website. There’s a fundraising page creator, donation forms and buttons, and social media, email, and SMS integrations. A CRM system generates reports and offers a visual overview of activities.

You can run unlimited peer-to-peer, team, and event fundraising campaigns with Mightycause. Campaigns aren’t required to meet set goals, so if your fundraiser doesn’t reach its target, you can still use the donations you receive.

Fees: $79 to $119 monthly, depending on your plan. Up to 1.9% plus 49¢ in payment processing fees.

Pros:

• Includes tools for nonprofit crowdfunding
• No goal requirements

Cons:

High monthly fees

Not for commercial projects

CrowdStreet

CrowdStreet offers individual investors the opportunity to contribute funds to real estate projects. So far, it has serviced $4 billion and counting in investments.

Real estate sponsors can apply for access to the platform’s marketplace and raise passive capital for their construction or financial projects. CrowdStreet also supports projects with investor management services and provides a digital marketing campaign for pitches.

As a niche crowdfunding platform, CrowdStreet is best suited to established real estate firms dealing in commercial properties. The platform’s annual market outlook report signals the project types with the most investor interest.

Fees: Specific fee structure varies depending on the deal. 

Pros:

• Real estate-specific platform
• Investor management and marketing support

Cons:

• Only for established real estate firms
• Thorough vetting process

StartEngine 

StartEngine is an equity crowdfunding platform where you can raise capital through the site’s network of more than 1.8 million prospective investors.

In order to open investment to the public, StartEngine allows fundraising through Regulation Crowdfunding (Reg CF), an exception to SEC regulations enabling companies to raise up to $5 million. While this process is more streamlined than traditional methods of raising funds from accredited investors, it still has strict financial and legal requirements.

Fortunately, StartEngine provides the financial review and legal documentation necessary to launch a Reg CF campaign. Companies can save on costs and infrastructure by capping their fundraising at $107,000, under the threshold that requires extensive financial reporting.

StartEngine is best for startups that have already demonstrated a growth potential and can invest upfront funds into their crowdsourcing campaign.

Fees: Varies. Between 5.5% and 13% commission.

Pros:

• Equity crowdfunding platform
• Financial review and legal documentation provided

Cons:

• Extensive preparation and documentation required

Conclusion

Crowdfunding is a powerful tool for entrepreneurs, creatives, and social innovators to raise funds and bring their projects to life. While it has its challenges and limitations, it’s benefits makes it an attractive option for many. As the industry continues to grow and evolve, we can expect to see new innovations, platforms, and models emerge.