When you need funding to launch your startup or pilot an existing business through the next phase of growth, loans are an obvious choice. But not every business can qualify for a small business loan. Crowdfunding can be an option worth considering.
How does crowdfunding work for business?
What is crowdfunding? In a nutshell, it means raising capital to fund a business venture from a pool of individuals or groups of investors. Crowdfunding essentially connects business owners who need money with those who want to fund their efforts. For example, you might launch a campaign to raise $100,000 and receive contributions of $1,000 each from 100 individual investors.
Crowdfunding platforms have brought this type of fundraising for small businesses into the mainstream, with entrepreneurs reaping many of the benefits. Understanding the ins and outs of how it works and what your options are can increase the odds of realizing crowdfunding success.
7 Best Crowdfunding Platforms
There are a slew of crowdfunding sites that help connect businesses with individuals who want to support them. Here’s a rundown of some of the best crowdfunding sites, along with a brief overview:
Kickstarter is best known as a platform for individuals and small businesses seeking to raise money for creative projects. Kickstarter campaigns often appeal to filmmakers, podcasters, musicians, artists, gamers, and food and beverage businesses. The company reports that from 2009 through 2020, nearly 19 million people pledged over $5.4 billion to more than 190,000 projects.
Indiegogo’s platform is all about fueling and funding creative innovation, primarily for start-up businesses in tech and design. The focus here is on raising money for start-ups and small business owners who are developing or have developed clever and unconventional products. Indiegogo offers entrepreneurs numerous tools to maximize the odds of a successful crowdfunding campaign, including an expert design team and marketing resources.
WeFunder makes investment crowdfunding widely accessible as campaigns can be funded with as little as $100. It aims to be the “pre-Nasdaq stock market.” This popular crowdfunding site caters to a wide range of businesses looking to raise money including healthcare and biotech, consumer products, tech and more.
StartEngine is an equity (or investment) crowdfunding platform that allows people to invest in early stage startups. For founders, StartEngine is unique in that companies can raise their first funding round on StartEngine and subsequently give shareholders the opportunity to trade, all on the same site. According to Crowdfund Capital Advisors, it was one of the top five investment crowdfunding platforms in the third quarter of 2020.
Republic vets startups and then allow investors to back those ventures starting with as little as $10. Republic says that less than 3% of startups that apply pass through its due diligence and investment committee. Republic Crypto allows investments using the Token DPA — a loan issued by the company
Seedinvest is also a top 5 equity crowdfunding platform. It features vetted startups (evaluated before allowing them to raise funds on the platform) and the minimum investment is as low as $500.
Kiva is a microlender that allows small businesses to borrow up to $15,000 in the U.S. at 0% with no fees. You’ll raise this money using their platform that allows lenders to lend as little as $25 to support a small business. Backers don’t make money lending on Kiva; instead they are motivated to help small businesses succeed. If you need a small amount of business financing, this can be an excellent option.
What Are the Benefits of Crowdfunding?
There are several aspects of using crowdfunding websites to raise capital that might appeal to small business owners.
Crowdfunding does not typically require the same qualifications as small business loans and other traditional financing options: good credit scores, strong revenues, and/or at least two years in business. In fact, it can be an excellent alternative to startup loans, at least for certain types of businesses.
If you’re been trying the fundraising route, you’ve probably discovered that very few businesses are successful landing funding through venture capitalists or angel investors. Crowdfunding can be a more accessible option for businesses that want to raise money but don’t have the connections those types of fundraising require.
This campaign can be used to attract accredited investors (or non-accredited investors if the platform allows it). An investor can review your campaign and decide whether to fund your business, versus you having to make pitch after pitch to raise capital. And keep in mind that some VCs and angel investors participate in crowdfunding campaigns.
2. Find fans
One of the best benefits of crowdfunding is that backers become fans. They don’t just support your business financially; they may also help promote your business on social media or to friends and family. After all, they want you to succeed.
3. Minimize debt
There are several different types of crowdfunding, which we’ll get to momentarily. But an interesting facet of most of the available crowdfunding options is that the capital raised doesn’t need to be paid back.
That’s appealing if you need money to get your business up and running but you’re not comfortable taking on debt right out of the gate. Keeping your budget as lean as possible, at least in the beginning, allows you to funnel money into things that can help fuel growth.
4. Multiple funding options
Crowdfunding isn’t one-size-fits-all and you have the opportunity to choose a funding option that’s best suited to your business needs. That’s helpful if you’ve been wary of taking on a loan because you aren’t generating steady cash flow yet or you only need to raise a small amount of money for your business. You can even start with crowdfunding, and, as your business grows, qualify for small business loans.
What Are the Different Types of Crowdfunding?
There’s more than one way to raise money from the crowd and some may appeal to your business needs than others. Here’s a comparison of the various avenues for crowdfunding a business.
- Rewards (or Incentive) Crowdfunding
- Equity (or Investment) Crowdfunding
- Donation Crowdfunding
- Debt Crowdfunding
Reward crowdfunding revolves around the idea of exchanging funding for a reward of some type for your backers. Say, for example, your business is developing a brand-new type of reusable water bottle that you think will be a huge hit. You could set up a rewards crowdfunding campaign and once it’s fully funded, use the money from your backers to manufacture 1,000 water bottle prototypes. As a reward, you’d offer each of your backers one of the water bottles. This could be one of the least expensive ways to raise capital for your business, depending on the incentive that’s offered.
Best Candidates for Reward Crowdfunding
- Businesses with a B2C product they want to bring to market
- Businesses that have refined their pitch
- New businesses seeking validation for a business idea
Equity crowdfunding (also referred to as “investment crowdfunding”) offers a way to raise money from investors, rather than focusing exclusively on venture capital, angel investors or loans.Similar to rewards crowdfunding, there’s a trade-off involved with equity crowdfunding campaigns. Your funders become investors, typically in the form shares or debt. If that’s something you’re comfortable with, equity crowdfunding portals could allow you to raise a significant amount of capital for your business.
Best Candidates for Equity Crowdfunding
- Businesses that want to build a community and gain exposure to venture capital and angel investors
- Businesses that have some previous experience with fundraising
- Startups with solid business plans that demonstrate how they will scale
- Businesses that have demonstrated viability for their products and/or services
If you’ve ever contributed to a GoFundMe, you’re likely already familiar with donation-based crowdfunding. Campaigns launched on donation-based crowdfunding platforms are funded through–what else–donations. The upside of donation-based crowdfunding is that since money is donated, it doesn’t need to be repaid. But you may not be able to raise as much money through donations as you would with equity or debt crowdfunding.
Best Candidates for Donation Crowdfunding
- Businesses in crisis that already have a loyal customer base
- For-profit businesses focused on philanthropic causes
Debt crowdfunding offers an opportunity for investors to crowdfund loans for small businesses and startups. With this type of crowdfunding, you’d be responsible for paying back the money from investors that funded your campaign, typically with interest. Kiva is one example, but many equity crowdfunding sites also allow the campaign to be structured as debt. This type of crowdfunding allows you to sidestep having to turn over equity in your company while investors benefit from the money they earned on their investment.
Best Candidates for Debt Crowdfunding
- Businesses that have sufficient cash flow to manage debt repayment
- Businesses that may have been unsuccessful in seeking traditional small business loans
- Pre-revenue startups with strong potential to scale
- Established businesses that are looking for sustainable and continued growth
Keys to Crowdfunding Success
Being successful with crowdfunding requires a few things, beginning with a careful analysis of the various types of crowdfunding as well as an understanding of how different fundraising platforms work.
You will need to start by marketing to your existing network, whether that is business colleagues and friends and family, or to your customers. If you’re afraid to do that, or if you haven’t established a way to keep in touch with your network (email or social media, for example), you will probably have a difficult time crowdfunding.
You have to decide what’s more important to your business, both in the short- and long-term. In gauging whether your business has what it takes to be a crowdfunding success, here are a few points to keep in mind:
- Your business needs to stand out. There are millions of businesses, individuals and nonprofits jostling for funding in the crowdfunding arena. Making sure that your business is unique and that your project is something that people will want to fund is essential when angling for a fully-funded campaign. A good marketing video and campaign will be essential.
- Investors need to value your incentive or reward. If you’re interested in rewards-based crowdfunding, the reward has to be something worthwhile to your backers. While a handwritten thank you note may be sufficient for some backers, others may only be satisfied by a quality product or service.
- You need to have a wide network. Networking is an integral part of raising capital for your business when relying on investors. The more people you’re able to connect with, the more you can spread the word about your project and generate interest.
Crowdfunding for Small Business: Final Word
Crowdfunding, whether it involves rewards, equity, debt or donations, can be a powerful way to raise funds for your business. Whether you’re launching a brand-new start-up or nonprofit or seeking to grow a business beyond the seed stage, business crowdfunding can make it possible.
You may also be able to use crowdfunding to supplement other small business financing such as business credit cards, invoice factoring or even SBA loans.
Can you crowd fund a business?
In short, yes, you can crowdfund a business. Most successful crowdfunding campaigns for business are not donation crowdfunding like GoFundMe, but instead allow supporters to either pitch in to earn specific rewards or incentives (such as merchandise or an early version of the product) or to become lenders or investors.
How much does crowdfunding cost?
Costs vary depending on the type of crowdfunding you use and the amount of money you are trying to raise. There will likely be platform fees, payment processing fees (for backers who want to pay by credit card), and typically a fundraiser fee that is a percentage of the amount raised will be charged as well. Equity crowdfunding campaigns typically involve legal fees as well.
The biggest expense, though, may turn out to be your marketing costs. You’ll need to produce a compelling video and you may need to invest in email marketing, social media marketing etc.
Can I crowdfund my startup?
Crowdfunding can be an excellent way to fund a startup, but it will take work to find and connect with those who want to support your new business. It’s not the easiest way to get money, but it can be easier than a startup small business loan. Find more startup financing options here.
Do you pay back crowdfunding?
Crowdfunding structured as a loan will require you to repay the loan. Other types of crowdfunding do not.