Crowdfunding is becoming an increasingly popular way for startup businesses and more mature firms to raise money. It seems easy: just sign up with a high-quality crowdfunding platform, list your funding needs, click a few buttons and ​poof! You’ve raised money. 

Of course, raising money for your business via crowdfunding isn’t that easy. Like any marketing or fundraising campaign, it requires a sound strategy and solid execution.

If you are a startup and you are thinking of using crowdfunding for your business, here is your chance. This article contains different methods you can use to crowdfund your business.

• What is Crowdfunding?
• How does Crowdfunding Work?
• What are the Best Crowdfunding Websites?
• What are the Pros and Cons of Crowdfunding for Business?
• Can I use Crowdfunding to Start a Business?

What is Crowdfunding?

Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture.

Crowdfunding makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together, with the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives and venture capitalists.

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In most jurisdictions, restrictions apply to who can fund a new business and how much they are allowed to contribute.

Similar to the restrictions on hedge fund investing, these regulations are supposed to protect unsophisticated or non-wealthy investors from putting too much of their savings at risk. Because so many new businesses fail, their investors face a high risk of losing their principal.

How does Crowdfunding Work?

Crowdfunding has created the opportunity for entrepreneurs to raise hundreds of thousands or millions of dollars from anyone with money to invest. Crowdfunding provides a forum to anyone with an idea to pitch it in front of waiting investors.

One of the more amusing projects to receive funding was from an individual who wanted to create a new potato salad recipe. His fundraising goal was $10, but he raised more than $55,000 from 6,911 backers. Investors can select from hundreds of projects and invest as little as $10. Crowdfunding sites generate revenue from a percentage of the funds raised.

Real World Examples of Successful Crowdfunding Ventures

Many of the products and businesses crowdfunded on Kickstarter became very successful and lucrative endeavors. For instance, Oculus VR, the American company specializing in virtual reality hardware and software products, was funded through the site.

In 2012, founder Palmer Luckey launched a Kickstarter campaign to raise money to make virtual reality headsets designed for video gaming available to developers. The campaign crowdfunded $2.4 million, ten times the original goal of $250,000. In March 2014, Facebook, Inc. (FB) acquired Oculus VR for $2.3 billion in cash and stock.

Another example of a company that rose to success through the help of Kickstarter campaigns is M3D, a company founded by two friends that manufacture small 3D printers. David Jones and Michael Armani raised $3.4 million for their Micro 3D printer on the crowdfunding site in 2014.

The tiny 3D printer, which comes with a variety of durable 3D inks, is now available at Staples, Amazon.com, Inc. (AMZN), Brookstone and elsewhere. The company has sales ranging between $10 and $15 million.

In April 2019, Critical Role, a weekly live-streamed tabletop roleplaying game featuring a group of prominent voice actors, raised $4.7 million in just 24 hours for its latest animated special “The Legend of Vox Machina.” No other 2019 Kickstarter campaign has raised that amount over their entire 30 to 60 day raising period.

What are the Best Crowdfunding Websites?

 There are sites where people can invest in your project, idea or business. Crowdfunding sites are all over the internet these days. Below we have gathered together the best crowdfunding sites for you whether you’re funding a startup, creative endeavor or raising money for a cause or project, there will be something on this list for you.

1. Kickstarter 

Kickstarter helps creators connect with the resources they need to bring their ideas to life. The company has helped 15 million artists, musicians, filmmakers, designers and other creators raise $3.7 billion to successfully fund more than 143,000 projects. It is an all or nothing situation with funding as you have to meet the gal you set within the allotted time or everyone gets their money back.

It is free to create a project campaign on Kickstarter but if you successfully get funded a 5% fee is owned from your collected funds. You will also get charged processing fees between 3-5%.

2. Indiegogo 

Indiegogo doesn’t just offer both live crowdfunding campaigns, but they also have a marketplace for innovative products. They have helped entrepreneurs raise $1 billion for than 650,000 projects. Find out if your idea has legs and raise starter capital with Indiegogo’s “global network of early adopters”.

With this platform, you don’t have to stop raising money at a specific time. There are no fundraising targets or deadlines and you can apply equity, offer securities, revenue sharing and even cryptocurrency sales.

Indiegogo charges a 5% platform fee for all projects. If you’re raising money for a cause, you don’t have to pay any fees with Indiegogo’s sister platform – GoFundMe.

3. Crowd Supply

Whether you want to bring a family recipe to market or build electronics, Crowd Supply can help you. Their mission to “bring original, useful, respectful hardware to life” has come to fruition with 70% of its launched projects being successfully funded (2x more than Kickstarter). The average amount raised per successful project is $66,000 (6x more than Kickstarter for comparable projects).

You can choose from a variety of Crowd Supply payment plans. The Standard Plan is 5% of gross campaign sales not including processing fees, the Guided play is 5-10% and the Custom plan 10—15%. Features differ per plan and include campaign management, media asset creation and a dedicated PR team.

4. Crowdfunder

Join Crowdfunder to connect to a community of 200,000 entrepreneurs and investors. This community offers equity crowdfunding which means that entrepreneurs to sell shares of their company to accredited investors. They have raised over $150 million dollars from 12,000 VCs and angel investors to help all sort of startups from Pre-Seed to Series A.

Crowdfunder offers Free, Starter ($299/month) and Premium ($499/month) plans each with a variety of services like document storage and personalized support.

5. Experiment 

This is the platform to fund scientific discoveries. Experiment backers fund projects that “push the boundaries of knowledge” like dinosaur fossil evacuations to the historical study of medieval monasteries. They fund project scientists without the overhead costs they would have to otherwise face with university grants (which can be 50-60%).

It is free to start a project but once you receive full funding Experiment charges an 8% platform plus payment processing fees between 3-5%.

6. Chuffed 

Chuffed helps social causes aimed at helping animals, your community or the environment. This platform is for not for profit companies and cause-based organizations exclusively. Their most successful campaigns have raised an average of $7,000. Nearly 8,000 campaigns have collectively raised $18 million.

Donors pay your processing fee. So, a $100 donation would require a $3 fee from the donor. Plus, all donors are encouraged to make a small donation to Chuffed too.

7. Patreon 

Patreon helps artists, musicians, writers and more get paid by running a membership business for their fans. This stream of revenue comes from fans paying you a subscription fee of their choosing in exchange for exclusive experiences and behind the scenes content. Creators have raised $350 million and the average patron pays a monthly fee more than that of Netflix and Spotify.

The fee is 5% of successfully processed payments. There’s no payment processing fee each time a payment is processed but it is batched at the end of each month. There are also payout fees charged for moving funds from your creator balance to your bank or PayPal account.

8. Fundable 

Create a profile on Fundable and then choose a program. Consumer-facing companies can raise up to $50,000 with their rewards program that allows entrepreneurs sell their products, taking pre-orders and selling merchandise. For companies looking to raise $50,000 to $10 million for their product, service or B2B business, they have the equity program that allows them to seek investment from accredited investors.

It is free to create a company profile and $179 per month to fundraise. There are no success fees but for rewards-based raises there is a processing fee of 3.5% + $.30 per transaction.

9. WeFunder 

With WeFunder you can raise between $50,000 and $50 million from investors. Most campaigns take between one and three months to reach their goals. From a small restaurant to tech startups, you will be able to solicit funds from more than 150,000 WeFunder investors.

It is free to create a WeFunder profile and they don’t charge management or transaction fees. Administrative fees are charged to investors to cover all the costs of operating WeFund.

10. SeedInvest 

SeedInvest works to high-growth, professional and early-stage companies to raise either preferred equity or convertible note funding. For priced rounds of equity, you will need to provide the pre-money valuation. For convertible notes, you will need to provide the valuation cap, conversion discount, interest rate and term length.

To use SeedInvest, you will need create an application, make it through the screening committee and conduct your due diligence before making a profile. This a platform for companies ready to make it big and you should expect the process to take a minimum of 60 days to complete.

There is a 7.5% placement fee charged on the total amount raised and it’s only paid on the successful completion of your campaign. You can also expect a %5 warrant coverage based on the amount raised and up to $10,000 in due diligence, escrow, marketing and legal reimbursement expenses.

11. Fundly 

Fundly advertises on their homepage that they “raise money for anything” with no raise requirements and startup fees involved. They funded everything from personal health needs to politics and even trips. Simply create a page, manage your campaign from the Fundly app and use Fundly’s Facebook OpenGraph to maximize your reach.

There is no minimum amount you need to raise to keep the money you have raised, payments can be withdrawn within 48 hours of a donation and automatic transfers can be arranged.
Everyone pays a 4.9% platform fee plus a 2.9% credit card process fee and $.030 per transaction (depending on your country).

12. LendingClub 

With LendingClub you can get a personal loan of up to $40,000 and business loans up $300,000. LendingClub is not a bank rather they connect borrowers with investors. Investors purchase notes that correspond to fractions of loans, in exchange for some solid returns.

LendingClub facilitates every transaction and screen all borrowers. When you have a business loan through LendingClub you will get your capital up front on one to five-year terms with no monthly payments and prepayment penalties.

LendingClub is recommended for large, one-time expenses. It is also required that your business has been around for at 12 months, have annual sales of at $50,000, no recent bankruptcies and ownership of at least 20% of the business.

There is an origination fee of between 1.99 and 8.99% and totally monthly payments per $10,000 borrowed of between $227 and $955 with total annualized rates of 9.77% to 35.1%.

What are the Pros and Cons of Crowdfunding for Business?

Rewards-Based Crowdfunding

Sites like Kickstarter and Indiegogo are called rewards-based crowdfunding platforms because companies or people who fundraise on them provide incentives (rewards, really) to donors who donate their money to worthy projects or companies.

It sounds easy: post your funding needs up on a website, offer some small rewards, and poof! you’re on your way to successful fundraising. Of course, it’s not that easy. Getting hundreds—or thousands—of people to donate to your project requires the same attention, planning, and execution as any successful marketing or fundraising campaign. Here’s how it works:

1. Set funding goals: Determine how much money you plan to raise with your fundraising campaign. This is a very strategic decision because many platforms function as all-or-nothing fundraising. That means, if you don’t hit your fundraising goals, you don’t see a single dollar.
2. Devise a reward strategy: Giving the right reward—the right incentive—can be the difference between hitting your funding goals or missing them. So, devise specific tiers of rewards for smaller donations ($5-$50) and larger ones (>$50). Get inside your donors’ heads and figure out what’s going to motivate them without breaking your piggy bank.
3. Post your campaign to a crowdfunding platform: Prepare your materials, a sweet video (those crowdfunding videos are becoming the infomercials of our age and are really important for successful crowdfunding), and your rewards. Then, publish them on the crowdfunding platform of your choice.
4. Get social: It’s really important not to rely on your platform of choice for bringing in your donors. Research has shown that there’s a direct correlation between the strength of your social media outreach and success in crowdfunding.
5. Take in your money and get ready to deliver the rewards: If you hit your target, you’ll receive your money. Now, it’s time to start building whatever it was you raised money for. Your donors are waiting.

Pros of Rewards-Based Approaches

• Access to “cheap money.” Using rewards-based crowdfunding, you’re raising money for your project or business without selling off an equity stake in your business. These are donations. And to boot, you get tens, hundreds, or even thousands of people committed to the success of your campaign. That’s really valuable.
• Pre-funding your next product. This type of crowdfunding is a great way to lay the groundwork for your next innovative project. You’ve already built a network of engaged, enthusiastic supporters who have gained through supporting your work. They’ll be eager to get involved next time as well.

Cons of Rewards-Based Approaches

• The pressure is on. Once you’ve successfully raised money, you’ve got to ship whatever you’re producing. The clock is ticking and it’s no surprise that many of the top crowdfunding projects are verylate in delivering rewards to donors.
• Lot of work, potentially little payoff. Because of the binary nature of some crowdfunding campaigns (if you don’t hit your target, you get nothing), you can wind up spending a lot of time and energy running a campaign that ultimately fails.

Equity Crowdfunding

Rewards-based crowdfunders make donations in exchange for rewards and the satisfaction of helping you achieve your goals. Equity crowdfunders are actually providing you with working capital in exchange for a piece of your company.

Pros of Equity Crowdfunding

• It’s smart money. By taking angel investing (individuals investing in startups) online, equity crowdfunding has opened up this type of investing to more and more people. There are very accomplished investors using these platform whose contribution may add to the success of your business long term.
• There are potentially larger sums of fundraising. OurCrowd is one of the most active equity crowdfunding platforms in the world, raising over $30 million in 2013. They routinely raise $500,000 to over $1.5 million for companies on the platform. Same goes for sites like AngelList, CircleUp, and FundersClub. That type of money is harder to come by in the form of $25 donations.
• Easier investor relations. Managing numerous investors in your company becomes a very time-consuming job. Instead of raising money from numerous investors, some equity crowdfunding platforms pool the funds they raise into a single investment, making one point of contact for reporting requirements.

Cons of Equity Crowdfunding

• Increased transparency. Not all entrepreneurs are comfortable posting their financials and business plans online for investors to see. Getting comfortable with equity crowdfunding means you must get comfortable with increased transparency into your business.
• “Expensive” fundraising. Why give away a piece of your company if you could receive donations to build your next killer product? It’s a strong question and one that entrepreneurs must see an answer to. Giving away a piece of your business’ pie is only worth it if you’re getting something valuable in return (like the participation of experienced investors in your industry, for example).

Crowdfunding has emerged to be a valuable, viable way for businesses to raise money. We didn’t even discuss the possibility of using crowdfunding to raise money via debt, small loans issued by individuals requiring payback. Crowdfunding platforms are finding more and more creative ways to fund new projects and businesses.

Can I use Crowdfunding to Start a Business?

Crowdfunding is rapidly gaining popularity as a way for startups to fund their businesses. It doesn’t require winning over investors, it gains attention for your startup before its launched, and it helps you evaluate what kind of demand there is for your product.

Whether you fund your startup entirely through crowdfunding, or use it as a stepping stone to winning investment from venture capitalists or the bank, here is a guide to the different kinds of crowdfunding – and which ones are best for you.

Equity-based

Equity-based crowdfunding involves multiple people investing in the business, receiving equity in the business in return. For example, you might put up 10% of the business in return for raising £90,000, with individual investors taking very small percentages – a 1% stake in the business would set an investor back £9,000, a 0.1% stake would be £900, and a 0.01% stake £90. You get the general picture. Popular platforms include Crowdcube and Angels Den.

The FCA has recently started taking steps to oversee the sector – new rules stipulate that only experienced investors are allowed to invest significant sums. New investors, often attracted to equity-based crowdfunding because of the ease and relatively small commitment, are limited to 10% of net ‘investibles ‘ (which basically means spare cash, excluding pensions and property.)

This is due to the risk of startups. However, this only applies to equity-based crowdfunding and peer-to-peer lending (more on that below) – reward-based crowdfunding remains unregulated.

The benefits of equity-based crowdfunding include no pressure to manufacture ‘rewards’ – it’s all about the future of the business – and the potential to gain larger sums of money then with reward-based crowdfunding, if you find investors who believe in your product.

However, as with anything that gives away equity, you’re relinquishing some stake in the business (however minor). You should also ensure that you’ve considered all the implications for multiple people holding equity in the business and draw up a contract that states what rights everyone has, to prevent problems down the line.

Who it’s good for: Businesses that are already established and looking to expand, or businesses whose product would be difficult to leverage as a reward.

Example: Say you’ve been running your hat business for a year, but you want to expand to a new location and diversify your range of hats. First off you have your business valued, giving you a figure of £150,000. You decide you’re happy to give away 10% of your equity to investors in return for £15,000.

You raise the money from 7 different investors, the largest share going to someone who invested £5,000, and the rest split in varying amounts amongst the others. You now own 90% of your business, but you’ve got a sweet £15,000 to cover your expansion costs and help manufacture your new line.

Reward-based

Reward-based crowdfunding is the crowdfunding you’re probably most familiar. This is crowdfunding where people pledge money in return for rewards – anything from a grateful shout out on social media, to early-bird access to your product or service, to VIP tickets to your lavish celebrity-strewn launch party. You don’t give away equity in the business – your responsibility is simply to raise the cash, and then make sure you can honour all of the pledges.

You set several tiers of rewards, increasing in value – so where a £5 pledge might get a thank you, for £100 or so people will expect a significant return, just as you would when buying a product. Where equity-based crowdfunding and debt-based crowdfunding often attracts people who are more investors than supporters, the people who will be backing your reward-based crowdfunder are your future customer.

A good rule of thumb within the crowdfunding community is to think of these backers as ‘friends of friends’ – people who’ve seen your campaign as it was shared by your immediate friends and family, then shared it to their friends, etc. Knowing your audience appropriately can help you set the correct reward tiers.

As mentioned above, reward-based crowdfunding is currently unregulated, as projects funded in this way are deemed to be less of a financial risk than the FCA. Websites such as Kickstarter and Crowdfunder don’t just fund businesses – they fund individual projects, artistic endeavours, and projects within the community.

And if your goal isn’t met, the project won’t be funded and pledgers won’t lose out. But if the project does meet the goal, it’s an excellent way to show future investors that there is a significant demand for your product, this validating your business idea.

As with all crowdfunding, if you don’t raise enough money then you can be left with long-term negative repercussions for your business – investors might be wary of backing a project that has publicly failed, especially if it’s bombed particularly hard.

On the other hand, if your project does particularly well and you overfund, you might have difficulty fulfilling all the orders, which can result in the anger of those who have pledged or, if you’ve miscalculated costs, leave you out of pocket.

Who’s it good for:  Crowdfunding is ideal for new projects that are yet to get off the ground, as it doesn’t depend on convincing investors – it just depends on having a great idea that a lot of people can get behind, and on marketing this idea. If you don’t have a track record, it’s an ideal way to go about getting one, proving demand for your product.

Example: Mous are a Virgin StartUp-funded business that needed an extra cash injection in order to finish manufacturing their innovative phone case that keeps your headphones safe and tangle-free. Taking to Kickstarter, they raised enough money to start manufacturing the cases for other models of the iPhone.

Rewards such as limited-edition colors and press attention saw them smash their goal. To avoid the problems of over-funding the Kickstarter, they built in a contingency plan for what would happen if they raised over their goal amount – these are called ‘stretch goals’ (extra goals that only happen if the project raises over the target.)

Debt-based (peer-to-peer lending)

Debt-based crowdfunding, or peer-to-peer lending, is a different sort of crowdfunding to what we’ve spoken about so far. It’s similar to a bank loan, except you’re lending from a syndicate of different people, often backed up by various corporations and government schemes. You are charged interest on this loan, just like any other loan. Funding Circle is one of the most popular peer-to-peer lending services for businesses in the UK.

On these sorts of platforms, businesses will be assessed for credit-worthiness before being approved. Investors can then choose who they want to invest in and agree an appropriate interest rate.

If the business ends up defaulting on the loan, the lender will lose out on the money, but as the loan is repaid the lender will make a profit thanks to the interest. Peer-to-peer lending is also an area increasingly overseen by the FCA.

Who it’s good for: As with winning investment from the bank, this is a form of crowdfunding more suited to more established businesses with business plans and a healthy financial track record. However it is less restrictive than a bank loan, and terms can be negotiable.

Example: You are a consultancy that needs to invest in some high-tech equipment to take you to the next level, but you don’t want to lose equity in the business for this. Rather than go for a bank loan you decide to lend from your peers, as you know there are some investors who would be interested in contributing, and you feel peer-to-peer investors will be easier to win round than the bank.

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As it’s for a fixed short-term cost, you feel confident that you’ll be able to repay it with interest to the lenders – keeping equity in your business, but benefitting from the new equipment.

Donation-based

While not relevant to most businesses, there’s one other form of crowdfunding that it’s worth mentioning – donation crowdfunding. This is most similar to reward-based crowdfunding – except there are no rewards in return. This type of crowdfunding is usually used to fund not-for-profit projects, help out individuals, or by charities and social enterprises.

Who it’s good for: Donation-based crowdfunding will only work for businesses that have a really strong social cause, or for individual projects within social enterprises.

Example: You’re a social enterprise based in the UK that wants to find extra money to fund the building of a well abroad. You start a campaign to raise money for this project, pledging to match the amount raised with the business’s own funds, and all money raised goes to this cause (except for the fee taken by the platform).

Summary

Crowdfunding can be an exciting, lucrative way to fund your startup or new product idea, but these opportunities often come with a lot of fine print. Take your time, understand all the requirements and ensure you can back up your promises with realities before you plunge into the crowdfunding pool.

If crowdfunding doesn’t make sense for your business, don’t get distraught. Even if you can’t get a traditional SBA loan or term business loan from a bank, there are many alternative ways to fund your startup besides crowdfunding, such as using personal and business credit cards to fund your startup.