Crowdfunding for Business: How it Works + Options

Benjamin Debonneville
Founder & CEO
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In today's digital age, as a business owner, you're no longer limited to traditional bank loans when you need to kickstart your venture. Have you heard of crowdfunding?

It's revolutionized the way startups and small businesses raise capital. Over $34 billion has been pooled globally via these platforms, making them a go-to for many founders.

Crowdfunding not only offers funds but can also build a community around your product or service. It's a game-changer, especially for startups and SMEs.

But how does it work, and which platform is right for you? Here is our guide for early founders and business owners.

What is Crowdfunding?

Crowdfunding: it's a word we hear often, but what does it really mean? At its core, crowdfunding is a collective effort. Instead of relying on one or two deep-pocketed investors, a business or individual seeks financial support from a wider crowd.

Imagine numerous backers each contributing a small amount to help get your venture off the ground. These campaigns are primarily run online, using platforms that set specific monetary goals within a defined timeframe.

It's not a one-way street, though. Backers often expect something in return for their support. Whether it's a product, a thank you note, or equity, the reward varies based on the type of crowdfunding you choose.

In essence, it's about harnessing the power of many to make your dream a reality. Think of it as a modern, digital-age twist on the age-old concept of pooling resources.

How Crowdfunding Works for Startups

Thinking of crowdfunding for your startup? Here's how it works for startups:

You start by choosing a platform that connects you to potential backers. Set a financial goal and deadline, and present your pitch, explaining your business idea and what backers will get in return for their support.

Platforms may charge a fee, usually after a successful campaign. The catch? Many operate on an all-or-nothing model. If you don’t hit your target, everyone gets refunded. It's a setup protecting backers from losing money on ventures that can't muster enough support.

A successful campaign not only provides capital but also validates your idea and helps build a customer base, setting a solid foundation for your business launch.

Remember, transparency is crucial. Be clear about your financial details to win and maintain your investors’ trust.

Types of Crowdfunding

For early founders, choosing the right type of crowdfunding can be a challenge. Different methods suit different needs.

Here we'll briefly introduce each type, helping you make an informed decision. Simple, right?

Crowdfunding: Understanding the Main Types

1. Equity Crowdfunding

When businesses need capital, they turn to equity crowdfunding. Here, investors pool funds for a startup, and in return, they get an ownership slice or equity. This means they're along for the ride, sharing in both growth and potential profits.

It's an attractive route for mature, growth-focused companies. However, there's a catch: while businesses get the needed capital, they do part with some control.

2. Debt Crowdfunding (Crowdlending)

Think of it as the community stepping in where banks often tread. In crowdlending, investors lend funds to businesses they resonate with. These companies then commit to repaying this loan with interest.

While it shares similarities with traditional bank loans, it’s decentralized — the money comes from multiple sources. The beauty? Businesses secure funds without surrendering ownership.

3. Reward Crowdfunding

Imagine wanting to launch a unique product but not sure if the market's ready. Enter reward crowdfunding. Backers chip in, not for equity or interest, but for non-monetary rewards.

It could be the product itself, exclusive merchandise, or behind-the-scenes access. It's an initial show of support for startups and a great way to test the waters before a full launch.

4. Donation Crowdfunding

This is where the heart meets the wallet. In donation crowdfunding, contributors support a cause purely out of goodwill, expecting nothing tangible in return.

Whether it's for an innovative social project, a community endeavor, or an environmental initiative, this type banks entirely on the noble cause and the trust of its backers.

Other Types to Consider

  • Profit-sharing/Revenue-sharing: Here, businesses pledge a portion of their future profits or revenues with those who invest. It’s less about immediate returns and more about future gains.
  • Debt-securities Crowdfunding: This is for those with an appetite for specifics. Instead of a general loan, backers get a concrete debt security, often a bond, that the company promises to honor.
  • Peer-to-peer Lending: It's a digital age take on lending. Individuals lend directly to businesses via online platforms. It’s Crowdlending's close cousin, emphasizing individual-to-business connections.

Pros and Cons of Crowdfunding

Every funding option has its own set of advantages and drawbacks for startups. Knowing them in-depth helps founders make informed decisions.

So, let's weigh the benefits and potential pitfalls of crowdfunding:

Advantages of Crowdfunding

  • Stronger Branding: Crowdfunding on your website boosts your brand identity. It’s all about you, not a third-party platform. This directs all media coverage straight to your brand, ensuring sustained interest post-campaign.
  • Avoiding Platform Fees: Third-party sites charge fees, sometimes hefty on bigger campaigns. Independent crowdfunding can offer more financial flexibility, potentially saving funds in the long run.
  • Flexible Duration: Going independent? Say goodbye to strict 30 or 60-day campaign limits. You set your timeline, allowing campaigns to adapt and grow organically.
  • More Backer Information: Kickstarters limit backer data. With independent crowdfunding, you gain deeper insights, fostering stronger connections with your supporters.
  • Ideal for Established Audiences: Got a loyal following? Leverage it! Independent crowdfunding caters to those with established audiences, turning fans into backers.

Drawbacks of Crowdfunding

  • No Platform Community Support: Opting out of platforms like Kickstarter means missing out on their vast community of repeat backers, a potential goldmine.
  • Loss of Anti-Fraud Measures: Third-party platforms have fraud protection. Going independent might raise trust issues, as backers are assured of no strict vetting processes.
  • Own Payment Processing: Handling payments yourself can be technical and daunting. You'll miss the convenience of platforms that manage this for you.
  • Demanding Marketing for Newbies: Without an existing audience? Be ready for intense marketing. Building a following while crowdfunding independently can be a herculean task.

10 Best Crowdfunding Options for Founders

For founders, selecting the right platform is crucial. With hundreds to sift through, which truly suits your startup?

Here is our curated list of the 10 top crowdfunding platforms to guide your choice:

1. Kickstarter

Kickstarter has stood tall as the go-to platform for creative ventures since 2009. Having successfully funded over 220,000 projects, it boasts a whopping $6.6 billion in pledges. The platform's allure lies in its straightforwardness: set a goal, share your story, and gather backers.

Though famed for innovative products and artistic endeavors, remember it's an all-or-nothing game – miss your target and backers get their money back.

While setting up is free, a funded project owes a 5% fee, plus processing charges. Its focus? Projects are shared with a community, not charity or equity stakes. An iconic choice for consumer-facing ideas.

2. Indiegogo

Indiegogo offers a flexible take on crowdfunding. Launched in 2008 initially for indie films, it now embraces all ideas, having funded over 800,000 projects worldwide. What sets it apart? The choice between fixed and flexible funding.

Miss your goal? With flexible funding, you still keep the contributions. Plus, they've evolved beyond just campaigns. Their marketplace showcases innovative products, making them a go-to hub for cutting-edge ideas.

While it charges a 5% platform fee, it's a favorite for its adaptability, especially for women-owned businesses. Choose Indiegogo for a tailored funding experience.

3. Patreon

Patreon stands as a haven for creatives. Instead of one-off projects, it champions a unique approach: monthly subscriptions. Fans support their favorite artists, podcasters, or musicians by choosing their subscription fee, granting them exclusive content in return.

With a payout exceeding $3.5 billion to its 250,000 creators, it’s fueled by 8 million dedicated “patrons.” This isn't about one-time goals; it's about fostering ongoing relationships between creators and their audiences.

While fees range between 5% to 12%, the platform remains a top pick for those wanting sustained artistic support. Dive into Patreon if you're a creator seeking enduring connections.

4. GoFundMe

GoFundMe shines as the beacon for those in need. Primarily recognized for personal causes - from medical emergencies to dream pursuits - it's also a viable option for service-based businesses or nonprofits.

Founded in 2010, GoFundMe boasts a mammoth $15 billion raised through the generosity of over 100 million donors. Whether it's helping someone offset a medical bill, supporting a farmer's educational journey, or rebuilding after a disaster,

GoFundMe is the virtual jar where people drop in their contributions. If you’re seeking heartfelt support for a cause, this platform stands out as a trusted companion.

5. SeedInvest Technology

SeedInvest stands as a beacon for budding startups. Since its inception, it's cultivated a community of over 700,000 investors, channeling more than $465 million into over 250 startups.

Not just a fundraising platform, SeedInvest garners attention from venture capitalists and angel investors alike. However, it's discerning, ensuring only top-tier startups make the cut after rigorous vetting.

An added boon? If your campaign doesn't hit the mark, there are zero fees. With a legacy of fostering business dreams and having raised its own capital notably, SeedInvest epitomizes the nexus between innovation and investment.

6. ArtistShare

Geared towards dynamic startups, WeFunder is an investment powerhouse that's helped over 3,102 founders accumulate $661 million.

Whether you're aiming for a modest $50,000 or a colossal $50 million, WeFunder provides a vast network of over 1 million investors ready to back innovative ideas. Set up your campaign in a mere 15 minutes and join the ranks of thriving businesses funded through this platform.

While it's free to ignite your fundraising journey, successful Regulation CF campaigns have a 7.5% fee. With its transparent pricing and extensive investor reach, WeFunder is the ideal launchpad for scalable startups.

7. MightyCause

Tailored for nonprofits, MightyCause champions relationship-driven fundraising, aiming to empower organizations to make a difference. Not just for one-time campaigns, it offers year-round fundraising, event-centric drives, and even giving days.

With plans starting at $59/month, nonprofits can effortlessly integrate their campaigns with social media and tap into a comprehensive suite of tools.

Trusted by notable entities like NuDay Syria and Doctors Without Borders, MightyCause is the optimal platform for nonprofits aspiring to connect, inspire, and raise funds.

8. StartEngine

For seasoned entrepreneurs eyeing equity crowdfunding, StartEngine emerges as a top choice. It's not just about raising funds; it's about offering equity to everyday supporters who believe in a vision.

With over $500 million raised and backed by the credibility of Kevin O'Leary from ABC's "Shark Tank" as a strategic advisor, it's a platform that speaks of trust and innovation.

Their recent acquisition of SeedInvest has expanded their reach, boasting a network of 1.7M potential investors and a staggering $1.1B in combined capital. Dive into StartEngine, and let the world invest in your dream.

9. Crowdfunder

Hailing from the U.K., Crowdfunder is making waves with its diverse crowdfunding options.

Catering to both rewards and donation-based campaigns, this platform has successfully garnered over £250 million for an impressive 300,000 projects, thanks to its strong community of 1 million supporters.

For businesses and for-profits, a modest fee of 5% applies, with an additional 2.4% for transactions. With its aim to address societal challenges, they've partnered with over 70 organizations to enhance crowdfunding efforts.

10. Funding Circle

Designed for businesses eyeing expansion, Funding Circle provides flexible loans ranging from $25,000 to $500,000. Catering to diverse sectors, from veterinary clinics to cosmetics, they offer competitive interest rates between 4.99% and 26.99%.

With repayment periods spanning six months to five years, their transparent system ensures no hidden prepayment penalties. An online application process, complemented by a dedicated account manager, ensures a seamless experience.

They stand apart with their quick decisions and an extensive range of loan options, including the pivotal Paycheck Protection Program (PPP) for COVID-19 relief. Get started with just a six-minute application and let Funding Circle guide your financial journey.

Final Thoughts

Crowdfunding is revolutionizing how startups and businesses secure essential funding. By tapping into a global community, entrepreneurs get not only capital but also a chance to test their ideas and gain invaluable feedback.

Whether it's through equity, donations, or rewards, each platform offers its unique edge. But remember, the key isn't just in choosing the right platform; it's in presenting a compelling story that resonates with potential backers.

Benjamin gave great tips to my start-up Blend for polishing and optimising my pitch deck, refreshing perspective. Recommend!