Crowdfunding has become one of the most popular methods to fund a startup, or for companies seeking growth funds to get to their next stage of development.
Rather than approaching banks, VCs, angels, friends and family for funds, a business owner can move their pitch to one of several online platforms that each offer different options for funding.
There are currently 4 different types of crowdfunding available:
Let’s take a look at how each operates, to decide which is best for your business and current situation.
There are three different levels of crowdfunding available: Equity 1, Equity II, and Equity III. Each level has more SEC regulations to conform to (which can be read here) in order to be eligible. After reading the rules stated in the last link, it should be obvious very few companies will opt for the crowdfunding option past the Equity 1 stage.
Equity 1 is the least regulated and doesn’t require the recipient to verify the types of investors they’re receiving money from, nor does it place any caps on the amount you can request. Most startup businesses will only use the Equity 1 round, before seeking specific and established VCs and angel investors for their next, larger round of funding.
Most equity crowdfunding platforms require an investment of at least $1000 from each investor in exchange for however much equity you’re willing to offer in your business for that amount. There are a number of reputable sites to choose from: Fundable, AngelList, Early Shares, CircleUp, Crowdfunder, Equity Net, and several other country and industry specific platforms.
Equity crowdfunding is mainly a startup financing tool and not something a company would use to help keep a business afloat or to launch new projects within an established organization.
Debt crowdfunding, in contrast to giving up equity, is no different from going to a bank for a loan. The loan terms are no different, though a business will typically pay more than a bank loan with a low prime interest rate. Each platform is different, but prime plus 3 – 5% should be expected.
The main difference with crowdfunding is that rather than receiving a loan from one or two lenders; a business receives smaller amounts of money from a large pool of mostly amateur investors. You can use debt crowdfunding money for any purpose you like, so long as the “crowd” agrees with you and loans you the funds.
There are several online sites to choose from including Lending Club, Prosper, Funding Circle, Upstart, GoFundMe, Indiegogo, and others. Some are industry specific like Indiegogo, while others like Funding Circle allow both individuals and business owners from all industries to host a campaign.
Debt crowdfunding can be used to launch new marketing projects, consolidate/pay down credit cards, buy inventory or equipment, or whatever you wish.
Rewards-based crowdfunding is very simple to define. Investors give a relatively small amount of money to a project (ranging from $1 – $2000 typically) in exchange for a reward. The reward is usually the first release of the very product they’re backing such as an artist’s album.
The main advantage with this crowdfunding method is that millions can be raised by a startup without the need to give up equity or pay back a loan with interest. Investors typically give their money because they believe in and want to see a product or service succeed more so than the desire to get an early release of the product itself.
Kickstarter and Indiegogo are two of the most popular platforms to launch a rewards-based crowdfunding campaign, but there are several others online to choose from, including several that offer equity and debt crowdfunding.
Donation crowdfunding is rarely an option for business. An organization or charity will present a campaign asking for funds to make a charitable effort a reality such as building irrigation systems in Africa or something similar.
There are, however, entrepreneurs – mainly social entrepreneurs – who launch projects that solve social issues, one product at a time – with the help of funders who share their mission, while generating income in the process.
Here are some world-changing ideas, powered by crowdfunding.
Trends in Crowdfunding to Watch for
Depending on the business you’re in, there are a number of trends going on in the space right now. Trends that will prove nothing but beneficial to businesses and individuals using these platforms to secure funds.
- Consolidation of Platforms: Many experts in the crowdfunding industry, and in business in general, expect that most of the smaller sites that have been cropping up over the last few years and carving their own niche, will get absorbed by the bigger players. This is good for everyone, as services will expand and improve with the change of ownership.
- Real Estate Crowdfunding Growing: Real estate crowdfunding platforms are growing and expanding at an alarming rate. This is great for upstart brokers and developers all over the world who need a way to break into the competitive world of real estate sales and development.
- JOBS Act a Game Changer: Never in our history has such a critical set of financial laws taken so long to be passed in the United States. The SEC demanded back in 2012 that immediate changes to the rules and regulations governing this industry be passed. Now, as of May 16, 2016, there are a set of very specific ruless in place to govern how campaigns are presented, how crowdfunding site staff and management conduct themselves, and how crowdfunded campaigns are marketed to the public (ie., solicitation rules). Learn more about the rule changes here before proceeding with a campaign – particularly if you’re seeking equity investors.
Pros and Cons of Using Crowdfunding to Fund Your Business
- Time: Time savings are big when it comes to crowdfunding your money as opposed to knocking on doors and pitching investors, or trying to find a bank or other lender to give you money. This is especially true for first-stage startups who have nothing more than a concept and no credit ranking.
- Free market testing: Take a product or idea and present it to the crowd and you’ll get plenty of relatively free and fast feedback as to what a large section of the market will think of that product or idea.
- Enhanced marketing: If you’re one of the lucky, hard-working businesses to gain traction on your chosen platform, free press coverage is sure to follow. Popular and/or highly-unique projects get plenty of attention from the online and offline press, which equals enhanced marketing for your business.
- No middle ground with funding expectations: Referred to by many as the “all or nothing model,” the majority of crowdfunding sites only release funds if you meet the specific funding goal you’ve listed. If you fall $100 short of a million-dollar funding goal by the deadline date, your company loses out on $999,999 in potential funds it could have used for funding.
- Increased number of liabilities: You could have hundreds or thousands of individual investors or debtors that you owe equity or principal plus interest to. This can be either a plus or minus when you go to approach next stage investors or debtors for your business. If your company is highly successful, it will likely be a plus, showing social proof of your business’s market viability. If you’re struggling or moderately successful, these liabilities will hurt more than help.
- Once on the Internet, always on the Internet: Whether successful or not, your campaign will forever remain on the Internet for all to see. This is evidenced all over, with articles like “Worst Kickstarter Campaigns Ever” and the like featuring abhorrent ideas like a Thomas the Tank Engine Themed RPG game and many others. No business wants to be remembered for sullying one of the most popular child television franchises of all time.
Tips for Securing Crowdfunding for Businesses
Here are some helpful tips to make sure your campaign results in funding instead of failure:
1. Be strategic in choosing a platform
The platform you choose is actually the most important task any startup or established business needs to make. It’s important to read the “About Us” section of each platform and to scour Internet forums and the like to learn what industries each cater to.
Some sites, like Fundable, cater to nearly every industry you can imagine, but their investors are also quite savvy and less likely to fund a fledgling startup without any market proof or profits backing them.
Kickstarter and Indiegogo, on the other hand, have less seasoned investors, who’re known for investing in ideas that captivate their attention, rather than merely looking at market viability and profit potential.
2. Prelaunch is critical
It’s important to dial in all the important factors in your campaign before launch. Most platforms force you to set a deadline to reach your goal. You don’t want to be flying by the seat of your pants after launch, trying to figure out why you’re not getting views and investors.
Hire a professional to produce and edit your pitch video, and work and rework your written materials until they’re as near-perfect as you can get.
Last, ask friends and family what they think of your pitch and product. Feedback is crucial to work out any problems in your pitch ahead of launch. Don’t start blasting your social networks until you’re confident in your offer.
3. Market post-launch
This might seem counter-intuitive. A lot of sources say to market aggressively during prelaunch in order to garner attention and press for your campaign.
However, because you don’t want to gather negative attention because your pitch is poor or the product still isn’t right, it’s important to wait to market your campaign on social, blogs, and/or brick-and-mortar methods until you’ve officially launched and received positive feedback from people you trust.