When you need funding to launch your startup or pilot an existing business through the next phase of growth, loans are an obvious choice. But if you want to go the nontraditional route and cast the net wider than business financing, you might consider crowdfunding instead.
In a nutshell, this means raising capital to fund a business venture from a pool of individuals, essentially connecting business owners who need money with individuals who want to fund their efforts. For example, you might launch a campaign to raise $100,000 and receive contributions of $1,000 each from 100 individual investors.
Crowdfunding platforms have brought this type of fundraising for small businesses into the mainstream, with entrepreneurs reaping many of the benefits. Understanding the ins and outs of how it works and what your options are can increase the odds of success.
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The seven best crowdfunding platforms
There are a slew of sites that help connect businesses with investors. Here’s a rundown of some of the best platforms, along with an overview of how they work:
- Crowd Supply
Kickstarter caters to individuals and businesses seeking to raise money for creative projects. For example, this platform might appeal to filmmakers, musicians, artists, gamers, developers or any other business owner with a creative bent. Over 17 million people have backed projects through Kickstarter, to the tune of $4.7 billion pledged.
Indiegogo’s platform is all about fueling and funding creative innovation, primarily for startup businesses in tech and design. The focus here is on raising money for startups and small business owners who are developing or have developed clever and unconventional products. Indiegogo offers entrepreneurs numerous tools to maximize the odds of a successful campaign, including an expert design team and marketing resources.
Crowd Supply accepts projects that have a narrow focus: bringing business ideas for hardware to life. If your business has a concept for an innovative processor or a stereoscopic camera, for example, you might choose to launch a campaign using this site. What makes Crowd Supply unique is that once projects are funded and a physical product is created, the platform also handles the selling and shipping of your hardware for you.
Crowdfunder is an equity crowdfunding platform that helps startups connect with an individual investor or group of investors to fund campaigns. This site is one of the most comprehensive, in terms of industries represented. Businesses of virtually every kind can launch and promote a fundraising campaign, including those in advertising and marketing, healthcare, fintech and real estate industries.
Fundable is designed for small businesses interested in equity and rewards-based crowdfunding campaigns. Similar to Crowdfunder, the industry representation is broad, and over $558 million has been committed to Fundable projects. One thing worth noting is that Fundable only allows businesses that have a U.S. presence, meaning that even if the business is physically located elsewhere, it must be registered to do business in the United States.
From an investor perspective, WeFunder makes investment crowdfunding widely accessible as campaigns can be funded with as little as $100. That platform has funded over 340 startups, with $120 million in combined capital. This site may be attractive to small businesses that have a physical product as well as those that need funding for creative projects or app development.
Fundly is open to both individuals and nonprofits seeking a fundraising avenue. Over $330 million has been raised through the site spanning a variety of missions. If you run a business as a sole proprietor or your organization is a non-profit, you may consider this platform for donation-based funding.
What are the benefits of crowdfunding?
There are several aspects of this type of funding that might appeal to entrepreneurs.
Fewer headaches to raise money
Going through one or more crowdfunding portals can save startups both time and headaches when trying to raise money. Rather than seeking out venture capitalists, angel investors or small business loans for funding, startup businesses can leverage crowdfunding sites to create a campaign.
This campaign is effectively a marketing tool that can be used to attract accredited investors (or non-accredited investors if the platform allows it). An investor can review your campaign and decide whether to fund your business, versus you having to make pitch after pitch to raise capital.
Create early buzz
One of the biggest struggles startup businesses often face is simply getting the word out. When you’re in the early stages and you may be bootstrapping operations, your marketing budget may be tiny or nonexistent.
Hosting a successful crowdfunding campaign could give your business a much-needed visibility boost, or at the very least, offer proof of your business’s potential if you’re making a pitch to an angel investor or venture capital group down the line. Crowdfunding websites can be the equivalent of free advertising for entrepreneurs who have a great business idea and limited means to promote it.
Minimize debt obligations
There are several different varieties of crowdfunding, which we’ll get to momentarily. But an interesting facet of some of the available crowdfunding options is that the capital raised doesn’t need to be paid back.
That’s appealing if you need money to get your business up and running but you’re not comfortable taking on debt right out of the gate. Keeping your budget as lean as possible, at least in the beginning, allows you to funnel money into things that can help fuel growth.
Multiple funding options
Crowdfunding isn’t one-size-fits-all, and you have the opportunity to choose a funding option that’s best suited to your business needs. That’s helpful if you’ve been wary of taking on a loan because you aren’t generating steady cash flow yet or you only need to raise a small amount of money for your business.
What are the different types of crowdfunding?
There’s more than one way to raise money from a crowd, and some may appeal to your business needs more than others. Here’s a comparison of the various avenues you may take:
Reward crowdfunding revolves around the idea of exchanging funding for a reward of some type for your backers.
Say, for example, your business is developing a brand-new type of reusable water bottle that you think will be a huge hit. You could set up a rewards crowdfunding campaign and once it’s fully funded, use the money from your backers to manufacture 1,000 water bottle prototypes. As a reward, you’d offer each of your backers one of the water bottles. This could be one of the least expensive ways to raise capital for your business, depending on the reward that’s offered.
Best candidates for reward crowdfunding
- Businesses with a B2C product they want to bring to market
- Businesses that have refined their pitch
- Startups seeking validation for a business idea
Equity crowdfunding offers a way to raise money from accredited and non-accredited investors, rather than focusing exclusively on venture capital, angel investors or loans. Similar to rewards crowdfunding, there’s a trade-off involved with equity crowdfunding campaigns.
In exchange for funding, you agree to give your investors a portion of the equity in your company. If that’s something you’re comfortable with, equity crowdfunding portals could allow you to raise significantly more capital for your business compared to what you might be able to raise using rewards-based crowdfunding, donations or debt crowdfunding.
Best candidates for equity crowdfunding
- Businesses that want to build a community and gain exposure to venture capital and angel investors
- Businesses that have some previous experience with fundraising
- Startups that are comfortable trading equity for funding
- Businesses that have demonstrated viability for their products and/or services
If you’ve ever contributed to a GoFundMe, you’re likely already familiar with donation-based crowdfunding. Campaigns launched on donation-based crowdfunding platforms are funded through donations. The upside of donation-based crowdfunding is that since money is donated, it doesn’t need to be repaid. But you may not be able to raise as much money through donations as you would with equity or debt crowdfunding.
Best candidates for donation crowdfunding
- Sole proprietors seeking small-scale funding
- Businesses that don’t have equity to offer or are uncomfortable taking on debt
- For-profit businesses that are focused on philanthropic causes
Debt crowdfunding offers an opportunity for investors to crowdfund loans for small businesses and startups. Peer-to-peer lending platforms are an example of debt-based crowdfunding. With this type, you’d be responsible for paying back the money from investors that funded your campaign, typically with interest. This allows you to sidestep having to turn over equity in your company while investors benefit from the interest returns earned on their investment.
Best candidates for debt crowdfunding
- Businesses that have sufficient cash flow to manage debt repayment
- Businesses that may have been unsuccessful in seeking traditional small business loans
- Startups that would prefer a funding option that doesn’t necessarily rely on building buzz or marketing
- Established businesses that are looking for sustainable and continued (not exponential) growth
Keys to crowdfunding success
Being successful with crowdfunding requires a few things, beginning with a careful analysis of the various types, as well as an understanding of how different fundraising platforms work.
Let’s go back to the water bottle example mentioned earlier. Say you’re trying to decide whether to pursue rewards-based or equity crowdfunding. On the one hand, rewards-based may have the lowest cost basis, since you may be able to produce the reward water bottles relatively inexpensively. On the other hand, you could raise more money for your startup and potentially have a campaign go viral using an equity crowdfunding platform.
You have to decide what’s more important to your business, both in the short- and long-term. The same is true when weighing debt crowdfunding as an option. The interest rate on funding may be relatively low but you need to have some certainty that your business can repay it. While debt crowdfunding is often considered a safer bet in terms of getting your campaign fully funded, there is a certain amount of risk involved. If your business isn’t able to meet your debt obligation and repay funding, defaulting could trigger serious financial consequences, including damage to your credit scores.
In gauging whether your business has what it takes to be a crowdfunding success, here are a few points to keep in mind:
- Your business needs to stand out in the crowd. There are millions of businesses, individuals and nonprofits jostling for funding in the crowdfunding arena. Making sure that your business is unique and that your project is something that people will want to fund is essential when angling for a fully-funded campaign.
- Investors need to value your reward. If you’re interested in rewards-based crowdfunding, the reward has to be something worthwhile to your investors. While a handwritten thank you note may be sufficient for some investors, others may only be satisfied by a quality product or service.
- You need to have a wide network. Networking is an integral part of raising capital for your business when relying on investors. The more people you’re able to connect with, the more you can spread the word about your venture and generate interest in your project.
The final word
Crowdfunding, whether it involves rewards, equity, debt or donations, can be a powerful way to raise funds for your business. Whether you’re launching a brand-new startup or are seeking to grow a business beyond the seed stage, business crowdfunding can make it possible.
This article originally appeared on Nav.com by Connor Wilson