What is crowdfunding? It’s one of the newest ways to fund a business. It’s been around a few years, but not as long as other funding options. It allows you to access tons of investors at once, and test the market at the same time. Here’s how it works. You market your business on the platform, and anyone who wants to can invest in the company. Some platforms will even accept donations as low as $5 or $10 dollars, though most do require more. With rewards-based crowdfunding, you get some token of thanks for your donation. With equity-based crowdfunding, which almost always requires $500 or more, investors get a piece of the company pie, so to speak.
What is Crowdfunding and Will It Work for You?
The question of what is crowdfunding is easy to answer. The question of whether crowdfunding will work for you is a whole other can of worms. It works well for some businesses, but not for every business. In fact, most find that they need to supplement their crowdfunding money with some other form of funding. Since it is debt free cash however, it is definitely worth considering.
What is Crowdfuding? The Basics
Now that you know the answer to what is crowdfunding, you need to know what it is not. First, it’s not ever a sure thing. While there are a lot of successful crowdfunding campaigns, the majority are not able to fully fund their business through crowdfunding. According to Startups.com, the average success rate of a campaign is 50%, and 78% of crowdfunding campaigns reach their goal. That sounds somewhat promising. However, it seems success depends greatly on your market, among other things. For example, here are a few more statistics from the same study with success broken down by the type of business:
- Business and Entrepreneurship: 41.4%
- Social Causes: 18.9%
- Films and Performing Arts: 12.2%
- Real Estate: 6.2%
- Music and Recording Arts: 4.5%
If you’ll notice, none of these hit the 50% success rate. What does that mean? It means whatever you do, be sure you have a backup plan.
What is Crowdfunding? Different Types
A lot of people do not realize there are actually two types of crowdfunding. There is rewards based crowdfunding and equity crowdfunding. Many see all crowdfunding as some sort of hybrid between the two. However, they are actually very different creatures.
In fact, while some platforms allow campaigns to do both, many only allow one or the other. It’s important to determine which one will work best for your business before you decide on a platform.
What is Crowdfunding? Benefits and Drawbacks of Each Type
Which one will work best for you will depend on a number of things. It can help to understand the benefits, as well as the drawbacks, of each option.
Rewards Based Crowdfunding
- Debt free
- Do not give up equity in your company
- Relatively easy
- Typically raises smaller amounts of money
- Risk lawsuit if do not follow through on promises
- Rewards can get expensive
- Easier access to investors
- Faster way to show investors what you’ve got
- Less focus on regulatory compliance and more on getting product or service to the market
- Managing a lot of smaller investors can be harder than managing a few large stakeholders
- May need an investor liaison, which can be costly
- Reporting and auditing requirements can get tricky with a lot of investors
What is Crowdfunding? Which Platform Should You Choose?
There are a lot of options out there when it comes to crowdfunding platforms. They include some that are quite well known, and others that are not. Some allow for both types of funding, while others only allow equity crowdfunding or rewards based crowdfunding, not both. Here are a few of each to kick off your research.
Rewards Based Crowdfunding Platforms
They are the biggest crowdfunding platform. They have over 14 million backers and over 130,000 funded projects. Campaigns are for products and services such as:
- The arts and film
- Comics and illustration
- Design and tech
A prototype is required. Also, projects cannot be for charity, although nonprofits can use Kickstarter. Lastly, they do not allow equity crowdfunding.
Indiegogo has over 9 million backers. Their minimum goal amount is $500. They charge 5% platform fees and 3% + 30¢ third-party credit card fees. Fees are deducted from the amount raised, not the goal. As a result, if you exceed your goal, you will pay more in fees.
RocketHub is more for entrepreneurs who want venture capital. They give you an ELEQUITY Funding Room. This platform is specifically for business owners working on projects in these categories:
If you achieve your fundraising goal, you will pay a fee of 4%. In addition, you’ll pay a 4% credit card handling fee. However, if you do not reach your goal, that fee jumps up to 8% plus the credit card handling fee. As a result, RocketHub is best for companies that are confident they will make their goals.
Equity Crowdfunding Platforms
MoneyCrashers.com has a great list of equity crowdfunding platforms. Here are just a few.
AngelList is a trailblazer when it comes to equity crowdfunding. Their original mission was to form connections between technology entrepreneurs who needed cash and angel investors. Today, they remain true to their first love and so much more.
CircleUp works to help emerging brands and companies raise capital to grow. However, companies must apply and show revenue of at least $1 million to get a listing on the site. That said, the platform will sometimes make exceptions.
The process is thorough, which makes them a good option for entrepreneurs who already have an established business.
If your business gets approval for listing on CircleUp, the fee percentage comes from the total amount you raise.
Fundable actually offers both rewards based and equity crowdfunding options. Their basic profiles are open to the public.
They charge $179 per month to fundraise. Fees on rewards are: 3.5% + 30¢ per transaction. They do not charge success fees.
Though they do not make it formal, the companies listed here tend to lean toward a specific type of niche. For example, most are innovative and social or non-traditional.
The cool thing about Wefunder from an investor’s standpoint is, although most platforms set minimum investments around $1,000 or higher, this platform allows investment minimums to go as low as $100. Still, many companies go ahead and require at least $500. They companies on the platform vary widely including:
- Green energy
- Insurance and
- Even packaged food
Localstake hooks up investors with small businesses that are already generating revenue. These companies tend to be consumer-facing, such as food production, apparel manufacturing, or brewing. Localstake is unique in that it offers 4 different options to investors. These include revenue share loans, convertible debt, preferred equity, and traditional loans.
What is Crowdfunding? Set Your Campaign Up for Success
Whatever type of crowdfunding you choose and whichever platform, there are some things you can do to help your campaign be as successful as possible.
Do the Research
You have to know your market and what demand looks like. The only way to find that out is to research. Figure out how much money you actually need before you set your goal. Lots of business owners have started crowdfunding campaigns only to find the demand isn’t there or their goal fell short of the actual need.
For products, you need to have a sample to show investors. This is important. People are much more likely to let go of money if they can see something tangible. This is so vital that Kickstarter actually mandates that you to have a prototype to show potential investors
The Right Platform is Imperative
Once you know who your target audience is, you can determine if you would be best served by Kickstarter, Indiegogo, or another successful platform that is not as well known. If your audience doesn’t use the platform you are on, it won’t matter how great your idea or product is. They’ll never see it.
Goals Build Mountains
Setting attainable goals is necessary to success. Make certain you look at the numbers in relation to actual facts before you set a fundraising goal. Be certain you have production facilities on the line that can meet the timeline goals. Do not randomly set goals with no clue what it will take to reach them.
Marketing Makes the World Go Road
You can’t just throw something together. If you create a video, it needs to be professionally edited. Any social media should be specifically targeted toward your audience.
What Happens When Crowdfunding Isn’t Enough?
The best part of crowdfunding is that, for the most part, it is debt-free cash. However, it is not a given that you will raise all the money you need. What do you do if you need more? There are a few options.
Credit Line Hybrid
A credit line hybrid allows you to fund your business without putting up collateral, and you only pay back what you use.
Your personal credit score should be at least 685. In addition, you can’t have any liens, judgments, bankruptcies or late payments. Furthermore, in the past 6 months you should have less than 5 credit inquiries, and you should have less than a 45% balance on all business and personal credit cards. It’s also preferred that you have established business credit as well as personal credit.
Don’t give up if you don’t meet all of those requirements. You can take on a credit partner that does meet them. A lot of business owners work with a friend or relative to fund their business.
There are a ton of benefits to using a credit line hybrid. For one thing, this is unsecured financing. You do not have to put up collateral. Also, the funding is “no-doc.” That means you don’t need to provide any bank statements or financials.
Sometimes you can even get interest rates as low as 0% for the first few months, allowing you to put that savings back into your business.
The process is pretty quick, especially with a qualified expert to walk you through it. Also, with the approval for multiple credit cards, competition is created. This makes likely you can get interest rates lowered and limits raised every few months, assuming you handle the credit responsibly.
While grants aren’t typically a complete funding option, they can work very well as supplemental funding. If you are a business owner that fits into one of these categories, grants may especially be an option, though there are grants available to all business owners. Those that have the most grant opportunities include:
- Businesses in low-income areas
The competition is fierce for all grants, but they are free money. That makes them worth a shot for sure.
Loans are the tried and true funding option, but they aren’t all created equal. If you do not qualify for traditional loans, SBA loans can be a saving grace. There is a lot of red tape involved, and they are not fast, but because of the government guarantee involved, some businesses are eligible for these loans when they are not eligible for others.
When your credit score isn’t quite up to par, you may not be able to qualify for SBA loans easily either. In this case, online lenders can be a legitimate option. They tend to lean less on personal credit score and more on other factors such as revenue and time in business.
What is Crowdfunding? A Great Option!
Crowdfuding can be a great way to raise funds for your business. However, it’s not a guarantee. You definitely need a backup plan. A credit line hybrid is an awesome backup funding source, but there are others as well. SBA loans, grants, and online lenders all have their place.
The main thing to remember when it comes to crowdfunding is, you have to take the time to make educated decisions on whether you want to use equity crowdfunding or not, which platform best suits your type of business, and what kind of campaign goals you need to set. Once you make these decisions, all you can do is put your business out there and hope for the best. Good luck!
And for more information on funding options that aren’t crowdfunding, check out our many legitimate funding sources.