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What is crowdfunding?

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Last editedNov 20202 min read

There are many different ways to raise investment for early-stage businesses and start-ups, but crowdfunding is one of the most exciting. With research from Crowdsourcing.org and the World Bank indicating that crowdsourcing for business could be worth as much as $300 billion by 2025, it’s worth considering whether crowdfunding – as an alternative to traditional forms of debt and equity financing – could be the right move for your business. Explore crowdfunding websites in a little more depth with our simple guide.

Understanding crowdfunding for business

Crowdfunding refers to the practice of funding your business venture through a variety of people, rather than a traditional investment firm or angel investor. Using a crowdfunding website (like GoFundMe or Kickstarter), you’ll settle on a target figure before asking people to invest a small amount. There are plenty of examples of companies that successfully used a crowdfunding website to secure investment. One of the most famous is Oculus. Purchased by Facebook for $2 billion in 2014, Oculus originally launched on Kickstarter, seeking an initial amount of $250,000 .

Types of crowdfunding

It’s important to understand that there are several different types of crowdfunding campaigns, each of which is likely to have a slightly different impact on your company:

Debt crowdfunding – Like traditional business loans, money raised through debt crowdfunding (at a set interest rate) needs to be repaid.
Equity crowdfunding – Like private equity investment, equity crowdfunding refers to cases where you’ll provide investors with equity in your business in exchange for capital. There are a couple of benefits associated with equity crowdfunding; namely, you set the terms regarding how much equity you give up. Plus, unlike debt crowdfunding, you don’t have to repay the capital you’ve raised via crowdfunding.
Reward crowdfunding – Providing a slightly different crowdfunding model, reward crowdfunding is a system wherein you offer rewards to backers in return for investment. These rewards are usually linked to your product, i.e., early access to the service, special bundles, etc.
Donor crowdfunding – Finally, there’s donor crowdfunding. With this type of crowdfunding, you aren’t required to repay the funds or provide rewards, so you can invest the capital back into your business.

The type of crowdfunding model that is likely to work best for your firm depends on a range of factors, as well as the level of ownership that you’re prepared to concede.

How does crowdfunding work?

Crowdfunding for business is relatively straightforward. Essentially, you’ll first need to register with a crowdfunding website (some of the best options for small companies include Indiegogo, Seedrs, and Crowdcube) before explaining who you are and what you’re trying to achieve. Then, you need to promote the campaign and attempt to hit your target. It’s important to remember that some crowdfunding websites are all or nothing – meaning that if you don’t raise the full amount, you won’t receive any money. If the campaign closes and you’ve reached your target, the site will take a cut, and you’ll receive your funds.

Crowdfunding advantages and disadvantages for small businesses

There are many advantages associated with crowdfunding for business. Firstly, it’s a quick and simple way to get financed, with no up-front fees or drawn-out pitch process. It’s also important to note that crowdfunding provides your business with a great origins story, which can help drum up positive media coverage and PR for your firm. With some types of crowdfunding, there’s the additional benefit of not having to give up ownership of your firm. However, you should bear in mind that donation-based and debt-based crowdfunding tends to be less positively received for small businesses.

But it’s not all plain sailing, and when it comes to crowdfunding advantages and disadvantages, there are a few sticking points. Most importantly, crowdfunding requires an enormous amount of effort, time, money, and luck to do successfully. Plus, the amount of investment capital you can expect to obtain via a crowdfunding website is usually less than would be available with a traditional investment firm. Also, it’s important to remember that while successful crowdfunding campaigns can generate positive PR, unsuccessful campaigns can lead to negative coverage, which could damage your brand reputation.

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