To take your business off the ground, you’ll need to secure outside funding. Angel investors, banks, VCs, and government grants may be among your first options, but your sources need not be established institutions or people you personally know — they just have to support your goals and vision.
This is how crowdfunding becomes possible.
Crowdfunding Types
However, not all crowdfunding platforms are built the same way. They fall into 2 main categories:
- Reward Crowdfunding – encouraging public participation by incentivizing fund donation, regardless of amount given.
- Equity Crowdfunding – connecting with investors through a crowdfunding platform and allowing them to donate funds in exchange for equity in your business.
- Donation-Based Crowdfunding – similar to reward crowdfunding, but without the incentives given; commonly used by charitable organizations.
The crowdfunding type you’ll choose will depend on your business’s size, goals, and funding needs. Reward crowdfunding almost lets your business market itself, making it an ideal option for startups looking to increase their customer base. As for equity crowdfunding, an example would be how Germany-based security software ZenMate was able to raise £23K in 2018. Regardless of your ultimate decision, you should carefully consider the pros and cons of crowdfunding, as discussed in StartEngine’s piece: Leveling the Playing Field: Startup Funding Without the Golden Handcuffs.
Some companies do a combination of reward-type and donation-based, such as in the case of Arc, a remote career platform for developers. They’ve so far raised $1 million of capital from equity crowdfunding; now, they’re eyeing to become a ‘community-owned’ platform by enabling both customers and developers to be investors.
The Pros
There are a ton of benefits to crowdfunding, such as the following:
- You won’t get stuck in debt. Crowdfunding is a good alternative to traditional debt financing from banks as you don’t have to make monthly payments, declare business assets as collateral, and run the associated risks.
- You retain control over your business. Unlike receiving capital from angel investors or VCs, crowdfunding allows you to make business decisions as you see fit, and retain company ownership.
- It allows you to gauge market interest. Crowdfunding enables you to gauge how well supporters/investors respond to your business, and actually test pre-launch the marketability of your product or service.
- There’s better accessibility to funds. If sourcing capital from VCs and other traditional funding means is not working as it should for your business, then crowdfunding may be the less challenging path to take.
- It helps build your investor network. Crowdfunding connects you with potential investors who have the same vision for growth as yours. If your crowdfunding campaign is gaining widespread traction, you might even catch the attention of deep-pocketed investors.
The Cons
As much as crowdfunding proves to be a promising option, it doesn’t come without drawbacks and risks.
- Campaign changes can’t be made. Unfortunately, changes cannot be made anymore once your crowdfunding campaign has been launched. This inflexibility might compromise the entire project, especially if there are unexpected adjustments to completion times or terms and conditions.
- It’s highly competitive. It’s a SaaS world out there, and the industry’s faster-than-ever growth may keep your business fighting for customer and investor attention.
- Imitation is common. The ubiquity of crowdfunded campaigns make it easy for other businesses to copy your supposedly unique ideas. And going back to our point about fierce competition, you may be forced to think of larger-than-life concepts and product features just to fend off copycats.
- It may be a struggle for B2B startups. Most crowdfunding success stories are from the B2C marketplace. For B2B startups, however, it might be more of an uphill battle as investors may not instantly see the tangible impact of services or non-consumer projects.
- You may be subject to partial funding. Some crowdfunding platforms only allow you to access the funds once you’ve attained the goal amount. Not to mention fees you have to pay to the site — Kickstarter for example takes a 5% cut from total contributions.
Is Crowdfunding For Me?
The Securities and Exchange Commission (SEC) recently amended crowdfunding regulations, raising the maximum aggregate funding amount from $1.07M to $5M within a 12-month period. This hefty limit increase renewed the interest of startup companies in crowdfunding, especially in the midst of a turbulent economy brought about by the pandemic.
But while crowdfunding may seem like an attractive option for your business during these times, there are a number of factors to consider and you need to gauge which between reward or equity crowdfunding will work for you. Here’s a quick guide:
| If you are: | Equity Crowdfunding | Reward Crowdfunding |
| Pre-profit | ✓ | ✓ |
| Established with steady growth | ✓ | ❌ |
| Established and stable | ✓ | ❌ |
| Looking into global expansion | ✓ | ✓ |
| Acquiring new facilities | ❌ | ❌ |
| Rebranding or launching a new product/service | ✓ | ✓ |
| Restructuring capital | ✓ | ❌ |
| Closing M&A deals | ❌ | ❌ |
Final Thoughts
Crowdfunding has helped businesses everywhere secure much-needed capital, while also building them a community of supporters-turned-investors in the process. We hope this guide has helped you in your decision!
Accelerating business growth is surely no walk in the park as far as capital investments are concerned. But with a lot of funding options out there, you’re bound to find what will work best for your business, while of course considering where it is at the moment.
Aside from crowdfunding, here’s everything you need to know about Series A funding. Read the blog »
If Crowdsourcing isn’t enough, watch our exclusive On Demand session to learn about even more Alternative Methods of Fundraising, featuring Sophie Mekjian, Account Executive at StartEngine.
Photo by Markus Winkler on Unsplash