For entrepreneurs and startups with big business plans, taking the next step to raise capital can require a serious leap of faith. How will the project be funded? Who can help weed out the strong ideas from the weak ones? What will potential customers think of the product itself?
Crowdfunding sites can be a great way to answer those questions and more. These platforms provide access to a large number of potential investors (a.k.a., “the crowd”) who may choose to invest in your project, idea, or business — or not. They provide an alternative route to funding while also allowing you to test-market your business idea.
Read on to learn more about crowdfunding for business, including how it works, pros and cons, and platforms you may want to consider.
What Are Crowdfunding Sites?
Crowdfunding sites are online platforms that allow investors to fund a business or project. So rather than securing an investment from one or two large sources, an entrepreneur can appeal to a larger group of individual investors to raise the capital they need to grow their businesses.
However, that capital doesn’t necessarily come free. In exchange for their investment, investors may receive something in return, such as a reward or equity in the business. In addition, these platforms generate revenue by taking a percentage of the funds raised through the site.
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What Are the Different Types of Crowdfunding?
There are four main types of crowdfunding:
1. Donation-based crowdfunding: With donation crowdfunding, people give money to a person, company, or campaign without receiving anything in return. For example, if someone needs an expensive piece of equipment for a mission-based startup, they might ask for donations to help them make that purchase.
2. Peer-to-peer lending: With this crowdfunding model, also known as loan or debt-based crowdfunding, backers pledge money as a loan to help a company or campaign get off the ground. The loan accrues interest and has to be repaid within a set period of time.
3. Reward-based crowdfunding: With rewards crowdfunding, donors receive something in return for their donations. That can range from a discounted product or service to a branded perk like a t-shirt or coffee mug.
4. Equity-based crowdfunding: With equity crowdfunding, startups or small businesses give away equity or shares of their company in exchange for investment funding from backers. Usually, the more the backers give, the more shares they receive.
What Are the Benefits to Using Crowdfunding?
A few of the advantages of using crowdfunding for a startup business include:
• Access to nontraditional funding: Entrepreneurs and small business owners may be able to get funds outside the standard sources and avoid the sometimes rigid requirements that accompany them.
• Sites are often user-friendly: Especially with some of the more popular crowdfunding platforms, it can be easy to tell your startup’s story, feature compelling media and messaging, offer incentives and rewards, and have a one-stop-shop for potential backers to find you.
• A built-in brain trust: Customers (and backers) are only ever a click or two away. This gives you the chance to call on them for feedback and ideas and field their questions, concerns, and complaints. This continuous communication loop creates a built-in brain trust.
• Added marketing and media exposure: The more popular the crowdfunding platform, the more eyes on your campaign, and the higher the potential for press coverage and building brand awareness. This can help create buzz about your brand and build your customer base.
What Are Sites for Crowdfunding?
There are many different crowdfunding sites that help you raise funds for your venture. Here’s a look at a few popular crowdfunding sites for small businesses, including pros and cons for each.
Kickstarter
Kickstarter is one of the most popular and best-known crowdfunding sites. Since launching in 2009, it has funded over 200,000 projects and helped people raise over $7 billion. It use an all-or-nothing funding model, which means you have to meet the goal you set within the allotted time or everyone gets their money back.
Kickstarter Pros
• Massive marketplace with many users
• High visibility, exposure, and familiarity as a platform
• Transparent, all-or-nothing funding
Kickstarter Cons
• A massive marketplace means massive competition
• You can’t keep your funds if you don’t reach your crowdfunding goal
• Focused on consumer-facing products
Indiegogo
Indiegogo has helped bring more than 800,000 innovative ideas to life since 2008. Indiegogo lets people solicit funds for an idea, charity, or startup company, and backers can evaluate campaigns and support entrepreneurs and their innovations from the earliest stages of product development.
Indiegogo Pros
• Campaign creators have options to continue to raise money after a successful fundraiser
• Two types of funding options: all-or-nothing or keep-what-you-raise
• Charges competitive fees
Indiegogo Cons
• May not be the best choice if you do not have consumer products
• Large site with many competing projects
• If using flexible funding, you must ship rewards even if you don’t reach your goal
WeFunder
WeFunder is an equity crowdfunding site that, since 2012, has raised hundreds of millions for thousands of founders. Startups can raise anywhere from $50,000 to $5 million through the platform. However, companies often bring around half of their own investors to the campaign, so it helps to already have some traction before turning to the site.
WeFunder Pros
• Fees are competitive
• Connects you with a large network of investors
• Can start raising money in as little as 15 minutes
WeFunder Cons
• Not a good fit for early-stage startups with limited experience
• Often need to bring 50% of funds from your own network
• Equity crowdfunding comes with complex rules and regulations
Fundable
Fundable is a software as a service (SaaS) crowdfunding platform dedicated to getting funding through either rewards or equity. Businesses using its platform have raised more than $570 million since 2012.
Fundable’s main claim to fame is offering hands-on support to startups and small businesses as they navigate the fundraising process.
Fundable Pros
• Offers a hands-on approach from staff during every step of the process
• Give you the option of reward-based or equity-based crowdfunding
• Minimal fees for successful equity campaigns
Fundable Cons
• Entrepreneurs with rewards campaigns don’t receive any funding if they don’t meet their goals
• Flat monthly fees can get costly for unsuccessful campaigners
• Charges a subscription fee that’s required to fundraise
Patreon
If you’re searching for a crowdfunding platform that lets you raise money for your artistic endeavors, Patreon might be a solid fit for you.
Patreon helps artists give their fans exclusive access to their content and insight into their creative process. In doing so, artists can create a recurring revenue stream, feature work their audience loves, and build a connection with their fanbase.
Patreon Pros
• Helps creators crowdfund continuously
• Offers rewards-based crowdfunding opportunities and multiple subscription plans
• Keeps it light on the restrictions in comparison to other crowdfunders
Patreon Cons
• Some creatures have complained about issues in collecting funds
• There aren’t any built-in promotional tools
• Has received criticism for its customer service
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Alternatives to Crowdfunding for Your Business
For some startups, aspirers, and creators, crowdfunding may seem like an ideal way to raise seed funds. However, it’s not for everyone. Here’s a look at some alternatives funding options for your business.
• Small Business Grants: Grants for small businesses can be a great way to gather funds for a product or project. Grants are lump sums that are awarded to a business or business owner by government, nonprofit, and corporate entities. Unlike loans, grants don’t have to be repaid, although they may have stipulations about how the money can be spent. If you visit Grants.gov, you can find a list of small business grants and search them based on a variety of criteria.
• Small Business Loans: There are a variety of small business loan options for entrepreneurs and startups that need to borrow funds to grow their company. These include bank loans, Small Business Administration (SBA) loans, business line of credit, online loans, cash advances, and equipment financing.
The Takeaway
Crowdfunding sites are websites that allow investors to select from hundreds of startups and business ventures and invest just a small amount on their growth. There are four main types of crowdfunding: donation-based, debt-based, reward-based, and equity-based.
For a business or entrepreneur, crowdfunding offers a nontraditional funding route that can also help you test-market a business idea and build brand recognition. However, it can take a fair amount of time and effort to run a successful crowdfunding campaign. And, in some cases, you won’t be able to keep any of the funds if you don’t meet your fundraising goal.
In addition to crowdfunding, you can also explore small business grants and small business loans for your business.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
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