Crowdfunding has taken the world by storm over the past decade as an alternative form of business and personal financing. Made popular by the internet, crowdfunding encourages people within communities (and sometimes across the globe) to invest in business ideas and turn invention blueprints into viable products. Crowdfunding is also used to cover startup and operating costs to grow your equipment or get the materials you need.
Crowdfunding could be the funding alternative that you are looking for to launch or expand your business. Learn more about this option and how you can take advantage of it.
How Does Crowdfunding Work?
The practice of crowdfunding refers to securing small amounts of capital from several individual sources that add up to a large amount. For example, if your business needs $10,000, a team of 500 investors could give you $20 each to reach your goal.
Depending on the crowdfunding site you use, you would either pay these investors back or offer gifts and incentives to thank them for their support.
When you look at various trends related to crowdfunding, you can start to see what makes a business successful at raising funds with the support of others. According to Startups.com, the average successful crowdfunding campaign is $7,000, and it takes about 11 days to secure that funding. The average crowdfunding donation is around $88, and companies that hit 30% of their goal within the first week are more likely to succeed.
Tapping into internet virality is one of the keys to successful crowdfunding. If you can generate a lot of buzz about your project and get people interested, you can grow your exposure and increase the chances of securing the funding you need.
Pros of Crowdfunding
There are many advantages to crowdfunding for your business, which is why this financing option has become so popular. A few reasons to consider crowdfunding to help raise capital for your business include:
- You don’t have to pay your investors back. Unlike most funding options out there, many crowdfunding sites don’t require you to repay the loan to those who invested. Instead, you provide value in the form of services or products. The crowdfunding sites that require repayment usually offer favorable interest rates well below what you might see from a traditional lender.
- Your funding becomes a source of marketing. You can grow a base of potential customers by offering gift cards and sample products to people who donate. Plus, these people are invested in your story and want to see you succeed.
- The funding is fast. If you can raise the funds you need within a few days, you don’t have to worry about meeting with financial providers or waiting for approval on a small business loan.
- You can use other sources of equity. Just because you choose crowdfunding doesn’t mean you can’t secure a small business credit card, short term loan, or another funding source. This capital is an addition, not a replacement to traditional financing options.
Many crowdfunding sites try to mitigate risk for customers to encourage companies to create campaigns. You can use this information to your benefit when determining the right site for your crowdfunding campaign.
Cons of Crowdfunding
While crowdfunding can be a great source of financing, it also comes with drawbacks. A few of these include:
- You have to hit your fundraising goal. Some sites won’t offer partial funding. If you don’t hit your goal, then the funds are returned to your investors.
- The funding isn’t guaranteed. People might not be interested in your idea or you might not get the exposure you want.
- You may have to pay a fee for listing. Instead of repaying investors or paying interest, you may have to pay to list your campaign and then invest even more to help it gain exposure on that platform.
- You need to prove the viability of your project. As crowdfunding becomes more common, competition and scammers will make it increasingly difficult to attract investors. You will need to show that you have a real business plan and will deliver on your promises.
As a whole, crowdfunding is extremely competitive and risky. While an investor at a bank or equity firm might evaluate your business objectively, private donors online choose which options they think are the best. There is also a finite amount of funding through crowdsourcing, which creates a limited pool for you.
Popular Crowdfunding Platforms
The success your business has with crowdfunding could very well come down to the platform you use. Here are a few common platforms that have gained traction over the years and have strong reputations among business owners.
Kickstarter is one of the most widely known crowdfunding sites. If you are looking for a large crowd, this is where you want to go. This website has successfully funded more than 187,000 projects with almost 18.5 million backers. While it may be harder to get noticed, you will have a larger audience to draw from.
Indiegogo is a popular site for inventors and business owners who create unique products. Your investors will follow you from the concept to the production process and become some of your first customers. Investors make donations based on which product ideas they most want to become realities and which development plans are the most viable.
Crowdfunder is specifically meant for entrepreneurs looking to launch their businesses. It boasts 15,000 accredited investors and a community of 200,000 members. This is an important website if you want to secure a large amount of funding to grow your business on a national or international scale.
Crowdcube is a UK-based crowdfunding site where you can set different levels of financing that you need. For example, you can opt for seed money, ask early-stage financing to get your business off the ground, or vie for growth with large-scale loans. On this platform, your investors help you set realistic targets and expect you to stay accountable for the money they give. This process increases the security of the investments people make.
If you need funding for your business and aren’t sure about your ability to secure a short term loan or take out a business credit card, consider crowdfunding. This capital could be the jumpstart you need to launch or grow your business.