Should you crowdfund?

What is crowdfunding?

Crowdfunding is sourcing money – usually via online means – from a group of people. By reaching a large number of individuals, those doing the crowdfunding can often raise large amounts of money without taking out loans, emptying out their savings or tying themselves to venture capitalists or banks. Today’s crowdfunding efforts run the gamut, financing everything from independent films to research and even life-saving medical treatments.

At the heart of modern crowdsourcing is the desire to create possibility. Indiegogo co-founder Slava Rubin found his inspiration in a woman who had been consistently turned down for in-vitro fertilization. Hospitals, doctors and insurance companies would not even afford her “the opportunity to fail.”

Crowdfunding gave her the chance to try – to at least make the effort to beat the odds. It can do the same thing for your business.

Advantages of crowdfunding

The most popular crowdfunding platforms can put your project or cause in front of millions of people – that’s a lot of wallets that can potentially help you reach your funding goals. Much like the logic behind diversifying your investment portfolio, a crowdfunding investment is typically spread across many individuals, each of them donating a small sum. This is appealing to both parties involved in a crowdfunding effort; it negates the risk of depending entirely on one or two sources (like venture capitalism) and spreads the financial labor across a wider field.

Crowdfunding also allows you to connect deeply with the potential customers of whatever field you’re in. If you’re a writer, you can reach potential readers; filmmakers can tap directly into future moviegoers. Crowdfunding platforms provide the opportunity for a unique type of advertising: You can present your full story to your potential investors. You can release updates and changes in real time, as well as solicit audience engagement and feedback.

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Types of crowdfunding

Crowdfunding investment isn’t one size fits all. There are four primary methods of crowdfunding.

Donation

This is the most well-known type of crowdfunding, and it’s probably what comes to mind when you consider what crowdsourcing involves. You are taking your product, service or story directly to the people, asking them to donate as much as they’re willing to your effort. They do this without any expectation of reward. You may choose to offer something small to those who make particularly high donations, but money is contributed in the true sense of the term: Your backers don’t expect anything in return.

what is crowdfunding

Reward

tips for equity crowdfunding

The next step up from donation-based crowdsourcing is reward-based crowdsourcing. You’re asking for the same amount of money from the same number of people, but you’re offering them rewards in exchange for that funding. Rewards are typically tiered and related to the product, service or project on offer. For example, if you’re crowdfunding a furniture store, those who donate $50 might receive a small piece of décor; those who donate $500 and up might receive a piece of furniture like a footstool or bookcase, and those who donate over $1,000 receive a custom-designed piece.

Debt crowdfunding

Compared to the two methods described above, debt crowdfunding looks more like a loan. And that’s exactly what it is – a loan, albeit one taken from a group of interested people instead of one person or a bank. Also referred to as peer-to-peer lending, debt crowdfunding requires you to pay back the loan – or the portion of each loan, plus interest – to each investor at a date specified in the initial agreement.

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Equity crowdfunding

crowdfunding investment

Equity crowdfunding is much like what it sounds like: Investors finance your product, service or business through a platform, but they receive a percentage of your business – equity – instead of the repayment of a loan. The incentive for investors to donate is tied to the success of the business; if your company does well, then their equity is worth more. If your company does not do well, their investment may have been for nothing. Since your potential investor must truly expect nothing in return – even though they hope for the best – it’s up to you to convince them that their investment will be a wise one.

Crowdfunding platforms have dramatically shifted the way small businesses raise funds – they’ve made obtaining the sort of capital once only available from large firms and loans possible even for those operating on an individual level. Choose which method and which platform are right for your business and go raise money for something wonderful – now’s your chance to beat the odds.

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