With so many funding options, which is right for you?
When starting out in a new industry, young companies have to overcome a number of hurdles which include gaining publicity, competing with established firms and learning how to navigate the world of business. However, more often than not, the main challenge for many businesses (and not just startups) is financial. There are various routes that can be taken in order to find substantial investment such as bank loans, venture capitalist money, angel investors (who exchange cash sums for company ownership) or simply self-funding. For many companies, especially startups, these options are well out of reach, but there is another way.
Crowdfunding is a type of crowdsourcing (finding resources via the Internet) by which projects are put to the public in the hope of generating finance. Those who like the concept contribute to the campaign, which is usually run by a crowdfunding site. This way, entrepreneurs can gain financial support purely on the merit of their product, without applying for loans or emptying their own pockets.
Although crowdfunding seems like a fairly recent phenomenon, entrepreneurs have benefitted from public financial pledges for hundreds of years. However, modern crowdfunding as we know it began in the 1990s, where individual members of the public pledged small sums of money to support certain ventures – including a US tour for British rock band Marillion. Since then, numerous campaigns have sprung up, accompanied by targeted crowdfunding sites. The most well know is probably Kickstarter, one of the biggest global crowdfunding platforms which is currently host to over 4,700 live projects. The corporation mainly focuses on creative industries such as film, gaming and art. Other well-known sites include Fundable and Indiegogo. Some companies and products were famously built by mass funding, like Oculus Rift, which raised a staggering $2,437,429 in just 30 days. Smart-watches have also proved to be popular, with the Pebble Watch raising over $1 million in its first hour. There have been some less obvious benefactors too, including a number of films and even a travel recommendations agency.
Different types of crowdfunding
Although it looks like almost anyone can benefit from crowdfunding, different projects require different types of investment. The main types of crowdfunding are donation, debt, equity and rewards-based. Donors who give financial support receive no reward for their investment, and donations rarely exceed four figures. An example of a donation-based crowdfunding site would be GoFundMe. The second type is debt (or lending) crowdfunding, which involves small loans provided by lot of lenders rather than from just one source. Lenders don’t receive a reward or a slice of equity, and they expect to be repaid. The third type, equity crowdfunding, normally involves larger figures as backers pledge money in exchange for a small share in the company. This form of crowdfunding was made legal in 2012 by the JOBS Act. UK platforms include EarlyShares and CircleUp – a US example would be Crowdfunder. Finally, there’s rewards-based crowdfunding. It’s pretty self-explanatory – people who pledge money receive a ‘reward’ of some description, which is usually the actual product that is being funded, or at the very least a discount code. Like donation-based crowdfunding, rewards crowdfunding doesn’t tend to attract large single investments. Kickstarter and Indiegogo would fall under this category, although they both also offer limited donation options.
Which type of crowdfunding is for you?
So, there are numerous types of crowdfunding, and they’re all best suited to certain kinds of projects. Donations, for instance, are most applicable to non-profit groups that are putting forward a charitable project. These organisations are unlikely to be able to offer any kind of material reward. Donations could also be given to individuals saving for college tuition, for example. Debt crowdfunding theoretically works in any situation, so long as the project creator knows they can reimburse their lenders. Equity funding is most compatible with young companies, as investors receive a share in the business and startups are eager to assemble a portfolio of shareholders. Established businesses are less likely to want to offer this kind of exchange as they probably already have shareholders and the company’s equity will be more precious. Lastly, reward-based crowdfunding would be a fantastic option for retail ventures, both for emerging companies and established firms. Backers usually receive a material product, which would help to expand the brand and could generate market research opportunities.
Ultimately, crowdfunding offers an alternative route for companies in need of funding. Mass public financing has been mainly associated with startups, but older firms can also benefit from debt and rewards-based options. Gaining enough financial support to develop a product is easier said than done, but sites like Kickstarter and CircleUp have given young companies a simple method of generating both money and general publicity. Entrepreneurs should be aware that different types of crowdfunding achieve different outcomes, and the best type of crowdfunding depends entirely on the type of company or project. An established company might be far better placed to look for debt crowdfunding than a new business that hasn’t finalised its yearly revenues, for example. Either way, crowdfunding as a whole provides a welcome alternative to traditional bank loans and self-funding, regardless of whether the organisation in need of investment is a bright-eyed startup or an industry veteran.
Have you or your company benefitted from crowdfunding? Which type of crowdfunding would be the most suitable for you? Have you supported a crowdfunded campaign? Share your thoughts and experiences.