Raising capital for a business used to be one of the most difficult aspects of starting or maintaining a business. Crowdfunding gained momentum in 2012 with a series of high profile campaigns such as Pebble, which raised over $10 million. The possibilities inspired more and more businesses to turn to popular sites like Kickstarter and Indiegogo to raise funds for projects or business ideas.
Yet, despite its popularity, a lot of people question whether or not crowdfunding is right for their business, and some are still completely in the dark as to how it all works.
What Is Crowdfunding?
It’s hard to know if something is right for your business if you aren’t even sure what it is.
According to the Small Business Association, “Crowdfunding is a collective cooperation of people who network and pool their money and resources together, usually via the Internet to support efforts initiated by other organizations.”
Fundraisers and entrepreneurs turn to sites like Kickstarter and Indiegogo as an intermediary to raise money for a cause or for equity for their new business. In many cases, projects on Kickstarter give those who support them something in exchange for that support.
Although the process sounds similar to raising capital through a venture capitalist, it does indeed differ. Raising capital through crowdfunding usually results in more backers with smaller amounts of money and there is usually a sense of urgency about the funding process. The opportunity to pledge money for a project usually lasts between 30–60 days. Beyond that, according to Crowdfunder, “Crowdfunding is a way to raise money. But, perhaps even more importantly, it also raises awareness and longer-term support for a business.”
What Are the Benefits of Crowdfunding?
Crowdfunding is an excellent option for small businesses looking to raise capital because it serves as a vehicle to reach a large number of engaged backers at a low cost. Sharing your ideas with a large audience also gives you validation from others that your idea is good, and as a bonus, you will also get the chance to solicit feedback from your target audience and potential customers.
Beyond raising capital, crowdfunding serves as a form of marketing. By building a network of backers, you are creating brand awareness before even launching your product, which is something many companies miss out on if they go with a more traditional fundraising route.
History of Crowdfunding
The origins of crowdfunding date back to 1997, when a fan-based Internet campaign was able to raise $60,000 for the U.S. tour of the British band Marillion. The movement continued to build momentum, and in 2003, ArtistShare, a crowdfunding platform and record label, was launched. This platform allowed the public to finance creative projects. This platform was followed by the launch of Sellaband, which dominated the early crowdfunding marketing.
The market was initially intended solely for artistic pursuits, until Kickstarter and Indiegogo introduced a much wider range of focuses.
Types of Crowdfunding
When it comes to crowdfunding, there are multiple options and platforms to choose from, according to your unique business or idea.
Reward-based, also known as non-equity-based crowdfunding, is used for a variety of purposes, including funding art projects, new technology, or an artist wanting to produce a new album. In reward-based funding, every backer is given something in return based on the value of their contribution. Kickstarter and Indiegogo are both considered reward-based platforms.
Donation-based crowdfunding involves the collective effort of individuals to help charitable causes. Muhammad Yunus, PhD, won the Nobel Prize for this work in microfinance that became the basis for the idea of donation-based crowdfunding. His Grameen Bank offered small loans to local entrepreneurs to help them start their businesses and fund existing projects. Examples of donation-based crowdfunding sites include Kiva.org and GoFundMe.
Peer-to-peer lending, or debt-based crowdfunding, allows people to borrow money outside of traditional banking channels. It gives people willing to risk lending money to strangers the opportunity to create loan portfolios at a click. Examples of peer-to-peer lending platforms include LendingClub, which Google invested $125 million to in 2013, and Prosper.
Equity-based is the least used among the various available crowdfunding methods, but unlike reward-based crowdfunding, it allows individuals to really invest in private companies. It also offers securities that have good potential for a positive ROI. Examples of equity-based sites are AngelList, CircleUp, FundersClub, and Our Crowd.
There are countless small business success stories around crowdfunding, and as more and more businesses quickly find success raising capital through these sites, it becomes even more intriguing to jump in.
Before turning to crowdfunding, make sure you have a solid business plan and trajectory. As there are several different ways to go about crowdfunding, to ensure success, make sure to do your research to select the best options for your business.