There are three different types of crowdfunding. Which is right for you? Here’s a rundown on each type of crowdfunding...
It sounds like a dream: You ask for funding online for your business and the money pours in. But with crowdfunding, that’s exactly what can happen – many people make small contributions that, added together, give your business a cash injection.
Well, it’s not exactly that simple. Crowdfunding has grown into a $16.2 billion industry and raising money online has gotten more competitive.
Not every business that tries crowdfunding will succeed. On the best-known crowdfunding platform, Kickstarter, only 36% of campaigns get funded. To make it more complicated, Kickstarter isn’t the only crowdfunding model.
There are three different types of crowdfunding. Which is right for you? Here’s a rundown on each type of crowdfunding, and its pros and cons for entrepreneurs:
The most popular and well-known type, rewards-based crowdfunding is the Kickstarter model. You create a campaign to fund a product or project, and offer backers rewards in exchange for their contributions.
Those rewards can be anything, but typically are things like advance copies of your new product, behind-the-scenes factory tours, newsletter updates, commemorative t-shirts. Campaigns can either be
• ‘All or nothing’ — where you don’t get any money if you don’t hit your fundraising goal, or
• ‘Flexible,’ where you keep whatever you raise.
• A high-profile win here can generate positive buzz – check out the nearly $700,000 raised and raves for the LIMBO gyro-top on Kickstarter, for instance (they’ve already moved on to raise even more on Indiegogo).
• Rewards-based crowdfunding can also be a great way to do market research or get feedback on new products, raise your profile, and build bonds with fans.
• Not all campaigns succeed and a failed attempt can be a negative if you try to raise funds later.
• Rewards-based crowdfunding demands a built-in audience of raving fans who are ready to back your project.
• You’ll have substantial up-front costs creating video and other marketing materials.
• Usually takes 3-6 months to prep and then run a campaign, so not super-fast.
Equity Crowdfunding (aka Crowdinvesting)
In equity crowdfunding, you don’t hand out ‘rewards.’ Instead, investors acquire a small ownership stake in your business. Essentially, this is angel investing mass-produced online. And it’s booming. Statista forecasts crowdinvesting will put $31.3 billion in entrepreneurs’ pockets in 2022, up from the current $11.2 billion.
What do investors look for in equity crowdfunding? Your startup should already have raised at least a little money, says Bill Clark, founder of equity platform Microventures.
You may have a hard time getting traction without someone influential who’s willing to take the plunge first. So, it’s also advisable to recruit a lead investor to get things going That’s a key thing platforms look for, says Clark.
“We only accept about 1% of applications,” Clark says. “After 7 years of doing this, we often look at deals and say, ‘There’s no way there’s an exit here.’”
Equity deals can be structured in several ways. Your business might issue private shares of stock, or debt as a convertible note, for instance. You pay off equity investors when your startup has an ‘exit’ event, e.g. your company gets acquired, raises more money, or holds an initial public offering (IPO).
If your company already has revenue coming in, you can do an equity deal based on revenue share. In this format, you pay back investors out of sales income, paying a hefty interest rate. The plus here? You retain full ownership.
- Equity crowdfunding can bring you investors with expertise to help your business grow. You can get money for general business purposes, rather than a specific product.
- It is relatively rare compared to rewards-based crowdfunding, so a successful raise can help you get media exposure.
- You can raise a LOT of money in equity crowdfunding – under one crowdfunding rule, amounts are unlimited, and some companies have raised multi-millions. For instance, 3-D printing company Unlimited Tomorrow recently raised $1.57 million on Indiegogo and Microventures’ joint equity platform, First Democracy VC.
- This is not a quick process – think 6 months to a year. Rules for equity crowdfunding online are complex, and the legal paperwork makes this a costly route.
- You’ll need investor connections to get this rolling.
- Most deals involve giving up an ownership stake in your company.
- Many startups won’t meet the picky standards of equity investors.
Crowdfunded Loans (a/k/a Crowdlending)
Crowdlending is simple: You get a loan online from many individuals, instead of borrowing money from a traditional bank. If you have a good credit rating, and a heartwarming story, crowdlending can be a way to raise quick cash for your business.
- This is the fastest crowdfunding method, with approvals available in a day or even less – much better than the endless red tape and picky requirements at traditional banks (or the months of prep needed for rewards and equity crowdfunding).
- Also, you can get a loan for working capital, rather than having to choose a specific product or project.
- Interest rates can be sky-high, if you don’t have good credit.
- Usually, this is a personal loan rather than a business one, so failure to repay could hit your credit rating.
- It’s hard to research best practices in creating your loan campaign, because most big sites only allow registered investors to view the loan requests.
Top 10 Crowdfunding Websites
Now that you understand the three different types of crowdfunding, you might be wondering what the best websites are for each type. Here’s an alphabetical list of 10 of the most popular platforms around the globe for business crowdfunding. This list includes top entrants in all three types of crowdfunding.
- CrowdCube (equity UK) – The biggest UK-based equity crowdfunding site, with over 700 successful equity crowdfunding campaigns. Notable: Entrepreneurs who use the platform get a ‘Funded Club’ for networking.
- Fundable (rewards + equity) – With two flavors of funding on offer, Fundable has seen $444 million in funding. Typical rewards campaigns are for less than $50,000. It’s part of the Startups.co family, which offers resources including business plans and mentoring.
- Funding Circle (loans) – The biggest crowdlending site that’s entirely focused on small business, Funding Circle has handed out $7 billion in loans to 51,000 startups. Good borrowers can get rates starting at 4.99%.
- Kickstarter (rewards) – The brand name in crowdfunding, the one that’s also a noun, as in ‘Do a Kickstarter.’ It’s popular – 150,000 projects funded.
- Indiegogo (rewards + equity) – This platform has options Kickstarter doesn’t, including an equity crowdfunding arm, First Democracy VC. $1.5 billion has been raised here, and campaigns can be ‘keep what you raise.’ You can switch a successful campaign elsewhere over to Indiegogo, and raise more money after your deadline—or, sell your merch in Indiegogo’s marketplace. Indiegogo also launched a Chinese site in 2015.
- Lending Club (loans) – The biggest crowdlending site, with $28 billion loaned. Here, startups compete with individuals and charity causes for lenders’ attention – but rates start at 5.99%, if you’ve got good credit.
- Microventures (equity) – Indiegogo’s partner in the First Democracy VC equity-crowdfunding platform, Microventures also runs its own equity platform. It’s done 75 deals, and invests in the startups that get funding on the platform.
- StartEngine (equity) – Over 200 companies have raised $62 million here. Startups can structure deals as private stock, convertible debt, revenue share and more. Site has a nice ‘test the waters’ option, so you can show your campaign page around prior to launch for feedback.
- Ulule (rewards) global — If you’re outside the U.S., Ulule is a site worth exploring. Its 65% success rate beats the pants off Kickstarter. Entrepreneurs in 193 countries have enjoyed its translation feature, which seamlessly serves up campaign pages in the language of readers’ own browsers. Socially conscious businesses do well here, as the motto is ‘Make Good Things Happen.’
- WeFunder (equity) — Over 200 startups have raised $65 million here, and recently 55 new campaigns were in progress. WeFunder runs its own investment fund, into which individuals pool their money.
For more details on these and a bigger list of popular platforms, see this Top 20 list of crowdfunding sites.
As you can see, there’s a wide variety of crowdfunding platforms, and each offers different advantages. If you’re considering crowdfunding for your small business, research carefully before you choose a platform.
Done right, it can be a terrific way to gain raving fans, market insights, investor expertise, and get cash to fuel your business growth.
about the author
Carol Tice is a Seattle-based business writer for Forbes, Entrepreneur and many others. She writes the award-winning Make a Living Writing blog. Her new e-book is Crowdfunding for Entrepreneurs.