Our lowdown on the four most common types of crowdfunding and the fundraising process.
Imagine having numerous individuals not just believe in your idea but also sponsor it. That’s what crowdfunding is all about. In crowdfunding, you raise funds for your business venture from the public by campaigning. As of 2020, there were over six million global crowdfunding campaigns. What’s more? As per a Statista report, the crowdfunding market size will amount to nearly US$26 billion in 2027.
Crowdfunding has the potential to be lucrative while not taking too much from your startup’s wallet. However, you also run the risk of not making any money at all and even having your idea stolen by another startup or corporation. All things considered, crowdfunding is a low risk way to raise money once you’ve accounted for the potential downsides. With that in mind, we look at the most common types of crowdfunding that your startup can consider:
1. Equity-based crowdfunding
Globally, US$4.41 billion has been raised through equity-based crowdfunding. As the name suggests, in equity-based crowdfunding, people invest in your business in exchange for a certain amount of equity—that is, the investor’s stake in your startup. You can have an infinite number of investors, and you don’t have to give them voting power, thus retaining the ownership of your business. The CEO and co-Founder of crowdfunding platform SeedInvest, Ryan Feit, adds, “The beautiful thing is that if you do an equity crowdfunding campaign, you not only raise capital but you also basically can market your product or service to hundreds of thousands of people and build an army of loyal brand followers.” He believes that these people would be your best customers and would spend more money.
2. Donation-based crowdfunding
Donation-based crowdfunding is based on investors donating money to your organization. This is a great option for non-profit organizations and humanitarian groups that require funding for their projects. Borrowers are not obliged to pay the investors back, and the latter might or might not receive rewards or perks. Additionally, the amount received will not be very high. Kickstarter and GoFundMe are some popular examples of donation-based crowdfunding platforms.
3. Rewards-based crowdfunding
In rewards-based crowdfunding, investors give you money in exchange for exclusive rewards, such as new products, one-of-a-kind services and the like. It is a great option for small businesses and startups that are just getting off the ground. By not having to pay the funders back, you are able to retain your capital while also keeping your backers appeased with rewards. You can also build your customer base while raising funds, which is especially important for companies launching a new product or service.
4. Debt-based crowdfunding
Also known as peer-to-peer lending, debt-based crowdfunding is based on investors giving you money and your startup paying them back the money, often with interest. The model works, more or less, like a loan. That said, this model will help you raise the largest amount of capital when compared to other crowdfunding models. Plus, you might even be able to categorize your debt interest paid to investors as a business expense in your startup’s tax return forms. This way, you end up saving money.
What is the crowdfunding process?
Now that you know the four most common types of crowdfunding, how do you get started?
1. Pick a crowdfunding platform to reach investors
From Indiegogo to SeedInvest Technology and more—there are numerous crowdfunding platforms to choose from for your startup. To figure out the right platform for you, do your research. How have crowdfunding campaigns by other startups performed on that platform? What percentage of your funding will you have to give to the platform? Overall, how credible and successful is the platform? Getting answers to these questions will help you better understand crowdfunding platforms.
2. Set a financial goal and the time frame to achieve it
Get clear on how much money you need, realistically, to achieve your business goals. Then, set a time limit to achieve it. You can set a short deadline and create hype and excitement among investors, thus urging them to invest immediately. However, if you don’t want to take the risk of failing while doing so, you can set a longer timeline, giving you enough time to attract investors.
3. Create a pitch and promote it
Why should people invest in your startup? That’s what your pitch will answer. To encourage potential investors to put their money into your business, create a crisp, to-the-point and powerful pitch that will explain your vision, goals and offerings. Then, use the power of social media, emails and more to promote your pitch and reach more people.
4. Offer incentives and urge investors to take action
What will investors get in return for investing in your startup? Get clear. Will they receive exclusive access to your store or to your new products before regular customers? Will they get additional services at lower costs? Incentivize investors into participating in your fundraiser and prompt them to not miss out on this opportunity.
Most importantly, remember to be patient. Crowdfunding requires hard work and lots of marketing. If you’re looking for affordable ways to market your offerings and attract investors, this article is a great starting point.
Header Image by Freepik
