One of the most popular methods of fundraising for a startup is the use of crowdfunding platforms. With crowdfunding, people choose to make a donation through an approved funding platform to help raise money for a specific venture or project. If you’re considering crowdfunding, it’s important to have an understanding of the various models available to you.
Here are two of the most popular funding models:
- Rewards-based crowdfunding (including both all-or-nothing and flexible funding)
- Equity crowdfunding
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Which model should you choose for your business? Let’s dig a little deeper into the following crowdfunding options:
Rewards-based crowdfunding
Rewards-based crowdfunding allows for crowdfunders to give donors rewards that are personalized and associated with a particular pledge amount. A pledge of $25, for example, may come with an e-book or similar gift that is easy to distribute to a wide audience. Larger pledges that go into the hundreds of dollars may include increasingly upgraded rewards and incentives.
Rewards-based crowdfunding is a win-win for both donors and users, because donors receive a unique gift or experience for their investment, while entrepreneurs receive the necessary funds that they can quickly apply to their business or initiative.
All-or-nothing funding
Even if you aren’t particularly familiar with the different forms of crowdfunding, you probably know a little bit about Kickstarter, which is easily one of the most popular crowdfunding platforms out there. Entrepreneurs must first be approved before they can launch a campaign on Kickstarter, and must set a goal and a timeline for the campaign’s completion. Once approved, he or she can start accepting donations to fund his or her business. Pledges are meant to be within a reasonable price range, and Kickstarter notes that the most popular pledge on the platform is $25.
Kickstarter’s operates on an all-or-nothing funding model, which means you will not receive the funds raised until the end of the campaign, and only if the campaign meets its goal.
However, if you do not meet the established goal, then all donors receive their money back. The all-or-nothing model has plenty of risks and rewards associated with it, so if you’d prefer more guarantees that the money will go toward your initiative, you may wish to explore rewards-based crowdfunding with flexible funding options.
Flexible funding
Rewards-based crowdfunding with flexible funding options, especially through platforms like Indiegogo, makes it possible to create a campaign in which donors receive a small reward for their donation. And unlike Kickstarter, which is an all-or-nothing platform, Indiegogo may be a better choice for you if you’d like the option of choosing flexible funding — which means that you get to keep the funds your campaign receives, regardless of whether or not you reach your goal.
While platforms like Indiegogo allow you to choose your funding structure (all-or-nothing or flexible), keep in mind that you cannot change your mind once a campaign has officially launched.
Related: From Our Founder: New Legislation Makes Equity Crowdfunding the Go-To Source for Startup Funding
Equity crowdfunding
Donors that contribute to a crowdfunding campaign on an equity platform, like CircleUp, receive shares within the company they are helping to financially back. Equity crowdfunding platforms are selective in picking out eligible businesses, and it’s important for entrepreneurs to understand the role that donors play. Donors who receive shares are now investors in the business, and as such, the business will need to show its new investors a steady return on investment within the company.
Read more about new equity crowdfunding legislation here, and why these recent changes could make equity crowdfunding the go-to source for startup funding.
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Which crowdfunding option is best for your business?
Choosing the right crowdfunding option for your business means factoring in what exactly your business needs, how quickly it needs the funding, and analyzing different types of platforms to see which will best address these needs.
If you are uncertain about which funding model to pick, or whether crowdfunding is best for your business in general, consider speaking with an accountant or CPA. They can provide you with answers to your questions and share any other funding methods or options that may be a fit for your startup.
Originally published April 29, 2021.
