How to use Crowdfunding to scale your Business

What is Crowdfunding?

“Crowdfunding is the collection of little amounts from many individuals in order to fund an emerging business.”

Raising capital can be a very tasking part for any pioneer, and this has been the burial ground for many business visionaries. Suppose a business will raise a substantial amount to fund the business. In that case, its visionary might have to look beyond getting money from personal savings, friends and family and current customers.

One way to do that is through crowdfunding; a business can have its expansion projects on a website or social media platforms and ask those who are interested in investing in the company to do so.

The fundamental understanding of this subject comes from the first letters of the word ‘Crowd’. However, crowdfunding can be used for a variety of interests, not just for business purposes. The first record of crowdfunding was in 1997 when a musical group based in the United Kingdom raised funds from fans for their concert.

Keynote: ArtistShare was the first crowdfunding site launched three years after the first recorded crowdfunding.

Types of Crowdfunding

It is essential to be confident about the crowdfunding options available before attempting to raise one. This will help you recognise the potential and risks associated with the different crowdfunding types. As a startup, you should be aware of at least four types of crowdfunding.

Donation-based Crowdfunding

Donation-based crowdfunding is commonly adopted by Not-for-profit organisations and social and community development projects. Those who give to this cause are called backers, and they do not expect a monetary return on their donation. Their donation is entirely based on Trust and commitment to their beliefs.

Pros

Backers do not demand repayment of their donation or request shares in the company.
It is an excellent way to build a community of people who are emotionally and socially invested in each other.

Cons

It is purely based on trust and emotions; hence, meeting the target can be really challenging since it has no tangible incentives.
Despite the fact that it is a donation-based crowdfunding, the crowdfunding platform of choice will charge a specified fee for processing transactions.

Reward-based Crowdfunding

Reward-based crowdfunding gives investors an incentive to participate as funding members at that time. Some of the rewards could be a coupon to get the product for free or at a discount price. A gift can also be sent as a reward for being an investor.

Pros

Reward-based crowdfunding only gives incentives to the investors and in no way obligates the business owner to offer a percentage of the company.
It can act as a marketing strategy to hook many people to the launch of the product by having a foretaste of what it is.

Cons

The “all-or-nothing policy” is a prevalent issue because some crowdfunding platforms return all the money to the investors if the fundraising goal is not met.
Delivering rewards/incentives to funding partners can be a lot of work, especially when it involves delivering tangible products to people in different parts of the region or country.

Equity-based Crowdfunding

Equity-based crowdfunding involves giving each investor a portion of the company’s shares after funding. This allows every investor to become a co-owner of the company. This method is crucial for startups with high-yielding potential to raise significant capital and offer a portion of the company’s shares to investors.

Pros

This type of crowdfunding is bound to attract more backers because it is an advantageous investment that, if successful, can provide a massive turnaround for the investor.
Unlike reward-based crowdfunding, where the relationship ends after the incentives are sent, equity-based crowdfunding allows the business and investors to continue for a longer period.

Cons

Since shares of the company are given away for investments, the founders are giving a portion of the ownership to the investors. If a founder wants total control of the company, then this type of crowdfunding will be a big deal.
Equity-based crowdfunding, due to its nature, is subject to more complex laws than other crowdfunding. The Securities and Exchange Commission monitors the operations of this type of crowdfunding in order to ensure that this does not cause investors problems in the case of losses.

Debt-Based Crowdfunding

This is slightly different from borrowing money from a bank. In debt-based crowdfunding, a crowd of lenders is willing to borrow the company’s money and expect it to be paid back after some time.

Pros

In debt-based crowdfunding, the company does not have to give up ownership of the business because once its debt is paid, it has no other obligation to its investors.
This could be an easier way to finance the company because repayment can be appropriately planned, and even in some cases, the interest on the loan will only sometimes affect the business.

Cons

A debt always comes with the burden of repayment, and as much as repayment can be adequately planned, it is always true that the easiest part of securing a loan is collecting the money.
If the company has not planned correctly, the interest on the loan can be a significant problem because soon, they will realise that the profit from the business cannot pay for the interest while keeping the business running.

Famous Examples of Crowdfunding Platforms

GoFundMe

GoFundMe was established in 2010 and has since then raised a whopping sum of over twenty-five billion dollars from a pool of 200 million backers. This is responsible for its reputation as the largest crowdfunding platform. GoFundMe has built its reputation around the niche of fundraising for individuals with health challenges and those who are in need of quick response due to natural disasters or unpredictable events like floods, earthquakes and wars.

Kickstarter

Kickstarter, a go-to fundraiser for startups, was established in 2009 and has since funded close to 250,000 projects. It has carved a reputation for itself as a fundraising platform for startups who want to widen their reach.

Kickstarter does not allow anyone to raise funds for charity or endeavours that do not give the investors an investment incentive or equity. The platform also does not fund businesses claiming to combat illness, political in nature, or gambling businesses.

Patreon:

A solution to many creative headaches, Patreon stands out for its contribution to the creative industry. It was established in 2013 by Jack Conte, a YouTube musician and Sam Yam. Since then, Patreon has raised over 3.5 billion in funds, making it the most prominent fundraiser for creatives.

Patreon is outright free to get started with; however, depending on your package choice, three packages come with a monthly fee. It offers a lite plan, a Pro Plan, and a premium Plan, which charge 5%, 8%, and 12%, respectively, on the money generated.

Other Relevant fundraising platforms are Indiegogo, StartEngine, MightyCause, Classy and Crowdstreet.

How to Know the Crowdfunding Platform That Suits

The Nature and Niche of Your Business or Idea.
The amount of funds you need to raise for the business or idea.
After funding a business that needs market validation and testing, the next step is to consider reward-based crowdfunding a better option.
The number of shares the company is willing to give to investors and whether the founder is ready to give up control.
The legal steps are tied to each of the crowdfunding types and whether the company is willing to get scrutinised.

Final Note:

There are many options to consider when raising money, and just like depending on personal savings and friends will not be effective at a certain level, crowdfunding at a certain level is. At a certain level, a company might outgrow crowdfunding because of the limitations and processes involved. However, if this is the step for you, then further your research with this exhaustive blog post and begin your campaign.