While starting a business often takes a lot of capital, startups and other new businesses have a more difficult time qualifying for traditional business loans. That’s where crowdfunding comes in. Crowdfunding is the monetary efforts of a collective of individuals who support a business venture or project. It’s a helpful way for entrepreneurs, innovators, and creatives to get their idea on its feet.
Jump to our infographic for a quick overview of everything you need know to know about crowdfunding, or read through our comprehensive guide for a more in-depth look at what crowdfunding is, types of crowdfunding, and how you can use this strategy to fund your small business.
Crowdfunding is a form of financing a project or business venture by raising small amounts of money from a collective of individuals. There are over 600 different crowdfunding platforms in the world that make it easy for entrepreneurs, investors, and people to connect. Anyone with an idea has the chance to pitch it to available investors. It’s a young, yet popular form of both crowdsourcing and alternative financing.
It’s growing exponentially—so much so that the crowdfunding industry is predicted to grow to $300 billion by 2030. Crowdfunding is completely transforming the way companies raise capital, how consumers behave with their money, and the market as a whole.
In order to launch your crowdfunding campaign, you first have to create your campaign—aka what you’re raising money for. Explain who you are, what you hope to achieve, and what you need to get there. Keep in mind that people are more likely to donate to campaigns that tell a story, so spend some time developing your pitch and what visuals (i.e. video, graphics, a product demo) you’ll include. You’ll also need to consider how much money you’re trying to raise and set your goal.
Once you get your campaign out there, it is open for individuals and groups to donate money to help you reach your funding goal. Anyone can contribute to your campaign, which means you have a better chance of reaching your goal quicker. Popular crowdfunding sites have also upped their technology, making it easier for people to browse campaigns, categorize which ones they like to donate to, and promote ones they like. If you’re lucky, your campaign will be one of them.
This can a much better option than peer lending, as you’re limited to your personal network, whereas crowdfunding campaigns (when done well) can be shared to a much wider audience.
The crowdfunding definition may be simple, but using this financing option isn’t always as easy. Crowdfunding is not as simple as posting your project and reaching your goal of $10,000 the next day. It takes strategy, a lot of preparation, and a clear understanding of which crowdfunding type and platform is right for you. Here are some initial steps and general guidelines on how to set up your crowdfunding campaign.
In what can seem like a complex industry of investment and banking, crowdfunding makes it easy to have the opportunity to grow your idea or business. Depending on your business and goals, you’ll want to choose the type of crowdfunding that’s most relevant for you.
Each type of crowdfunding has its own advantages and each platform is particular for a specific type, niche, industry, or project. Let’s break down the four types of crowdfunding, so you can determine which is the best fit for your business and decide which platform to use when launching your campaign.
The most popular type of crowdfunding is rewards-based, where individuals lend small amounts of money to a project in exchange for a reward or incentive. Funding can range anywhere from $1 to $1,000 and the reward can range from the product or service, perks, or simply recognition.
Crowdfunding was brought into the mainstream by two popular rewards-based crowdfunding platforms: Kickstarter and Indiegogo. These two platforms are more common with creative and newly innovative ideas or projects.
With equity-based crowdfunding, investors lend a larger amount of money in exchange for a share, percentage, or, like the title says, equity in the company. They then become stakeholders or part owners. Entrepreneurs can even set investment caps and minimum amounts if they choose. Equity-based campaigns are typically used to launch a startup and last a few months or longer to raise larger funding amounts (up to $100,000 or more).
As with any investment, there’s always a possibility that you can lose a portion or all of your return, so it’s good to keep in mind not just the potential, but also the risks. AngelList, Fundable, and Crowdfunder are popular platforms for equity-based crowdfunding catered more toward venture capitalists.
Donation-based crowdfunding is when a large number of individuals donate a small amount of money toward a project. Because it’s based on donations, contributors don’t expect anything in return, other than gratitude from the organization and the satisfaction of supporting a cause they’re passionate about.
Many charities, social causes, and nonprofits lean toward donation-based crowdfunding to raise money so funding targets are generally lower (typically $10,000 or less). Crowdrise, GoFundMe, Tilt, and Kiva are all popular donation-based platforms.
Debt-based crowdfunding is somewhat similar to getting a loan from a bank, except that a large amount of individuals lend you a small amount, with the expectation that they will be paid back the principal along with interest. Contributors don’t receive a reward or equity in exchange for their investment.
Many entrepreneurs, startups, or small businesses use this as an alternative to a traditional bank loan since they have more flexibility and options to get funds and resources. It’s most helpful to give a company the financial start they need to go on and continue fundraising.
Crowdfunding allows individuals to support the projects or companies that they believe in. On the entrepreneur side, you have the opportunity to test your idea and get valuable feedback from potential customers before going to market. Let’s dive into four key benefits of crowdfunding.
There’s no question that launching a crowdfunding campaign takes a lot of work. You have to put in the time and effort to build interest and buzz around your idea, which may require additional resources like a team and money. Here are four key challenges to crowdfunding.
Once you successfully raise money through crowdfunding, it may be easy to forget that you still may need to pay taxes on this money. Depending on the purpose of the campaign, the IRS still may consider those funds taxable.
There are three categories that your crowdfunding campaign funds may fall into:
Meredith Wood is the founding editor of the Fundera Ledger and a GM at NerdWallet.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.