Whether you’re interested in crowdfunding to start a new business or expand an existing one, this alternative method of financing can be a viable way to pump some life and energy into whatever project you’re working on. In addition to raising capital, crowdfunding can also help build awareness and excitement about your product, service, or company.
Here’s some helpful information to know about crowdfunding, including what it is, what the funds can be used for, popular crowdfunding sites, and more.
Key Points
• Crowdfunding provides startups and small businesses with an alternative funding source, allowing them to raise capital without relying on traditional loans or venture capital.
• Launching a crowdfunding campaign helps validate business ideas by gauging public interest and demand, enabling entrepreneurs to refine their products based on feedback.
• Various crowdfunding models exist, such as reward-based, equity-based, and donation-based, allowing businesses to choose the option that best suits their goals and target audience.
• Top crowdfunding platforms include Indiegogo, Kickstarter, GoFundMe, Mightcause, and StartEngine.
• In addition to crowdfunding, startups and small businesses can rely on venture capital, angel investors, and small business loans.
What Is Crowdfunding?
Crowdfunding is a method of financing a business venture, project, or cause by collecting small amounts of capital from a large number of people (a.k.a, the “crowd”) through an online platform.
A crowdfunding campaign usually has a monetary goal in mind and a set deadline to reach it. Depending on the type of crowdfunding you choose, you may need to repay a loan or provide some sort of incentive to those who invest in your campaign. Financial pledges can be made and collected through the crowdfunding platform.
Crowdfunding platforms typically charge fundraisers a fee if the fundraising campaign has been successful. Many platforms operate an all-or-nothing funding model. This means that if you reach your target, you get the money; if you don’t, everybody gets their money back, and there’s no financial loss.
Recommended: 5 Crowdfunding Sites to Help Fund Your Business
When Did Crowdfunding for Businesses Start?
Modern day crowdfunding got its start in 1997, when a British rock band (called Marillon) raised funds for its reunion tour through online donations from fans, who were eager for the band members to come to the United States.
The band’s unconventional approach to financing led to the creation of ArtistShare, a site designed to help musicians raise money to produce albums or go on tour, in 2000. ArtistShare became the first dedicated crowdfunding platform. Shortly thereafter, more crowdfunding platforms began to emerge, and the crowdfunding industry has grown consistently each year since.
What Can Crowdfunding Be Used For?
Crowdfunding offers a way for businesses or individuals to raise money online for their business, startup, new product or project, or personal cause. It can be especially helpful for entrepreneurs just starting out, who may not qualify for different types of small business loans from a bank and can’t (or don’t want to) borrow from family.
There are many types of crowdfunding, but the process generally allows users to raise money without going into debt, which is why it’s so appealing to so many small business owners who need to save every dollar they can.
The money you generate through crowdfunding, however, must be used for the exact purpose you share with your donors or investors on your crowdfunding site.
10 Popular Crowdfunding Sites for Small Businesses
Whether you’re looking for a small infusion of cash to jump-start your business or a large amount of capital to take your company to the next level, here are 10 sites that may be able to help you raise the money you need.
1. Indiegogo
Since 2008, Indiegogo (www.indiegogo.com) has helped bring more than 800,000 innovative ideas to life. It’s chock full of resources to help your campaign succeed, and you can even tap into support to help make the most of your marketing efforts.
2. Kickstarter
With over 267,000 projects funded, Kickstarter (www.kickstarter.com) is one of the largest and best known crowdfunding sites. The funding you raise on the platform is all or nothing, meaning you don’t receive any money if you don’t reach your campaign goal.
3. GoFundMe
GoFundMe (www.gofundme.com) has a 0% platform fee and is easy to use. It’s commonly used for medical expenses, emergencies, education, or community projects, offering an accessible way to fundraise. Plus, you don’t have to reach your campaign goal to access your raised funds.
4. Mightycause
Focused on charitable giving, Mightycause (www.mightycause.com) offers individuals and nonprofits a low-cost platform for raising money for their causes. The site offers flexible options, including year-round fundraising, peer-to-peer fundraising, giving days, and special events.
5. StartEngine
StartEngine (www.startengine.com) is focused on providing a way for investors to back early-stage startups, making it a good choice for new ventures looking for seed capital.
6. CircleUp
CircleUp (www.circleup.com) focuses on companies that sell directly to consumers and offers both equity capital and credit financing. You could be partnered with investors and get help with distribution and operations.
7. Crowdfunder
If you have a Shopify store and are interested in crowdfunding a new product through your own website, the Crowdfunder app can help you do that. The app enables you to accept pre-orders from people who are interested in your idea, and avoid paying fees to a crowdfunding platform.
8. EquityNet
If you’re interested in attracting equity investors, you may want to post your profile and business plan on EquityNet (www.equitynet.com). This platform connects entrepreneurs with a large network of angel investors, venture capitalists. and business supporters.
9. Fundable
You can opt for equity or rewards-based fundraising on this platform. Fundable (www.fundable.com) recommends the rewards option for startups seeking smaller amounts of capital that have something of value they can offer in exchange for funding, and the equity option for companies seeking larger amounts of capital that already have some traction.
10. MicroVentures
With over 200,000 investors, MicroVentures (www.microventures.com) connects angel investors with startups that need at least $150,000 to $1,000,000 in capital.
How Crowdfunding for Small Business Works
No matter which site you choose, building a crowdfunding campaign generally involves three steps. They are:
• Creating the campaign
• Marketing the campaign
• Raising money with the intention of reaching the target goal. Some platforms require crowdfunders to reach their goal in order to keep any of the money raised, others do not.
Creating the Campaign
The campaign phase is where you state what you’re trying to fund and why. It could be an idea for a new business, product, or even service.
Many successful campaigners spend a lot of time making compelling, easy to understand videos about why financial assistance is needed and why crowdfunding is their best option. They clearly state what the money will be used for and why they need the amount that they do.
Generally, telling a compelling story can be an important step in creating the overall crowdfunding campaign. Frequently, crowdfunding campaigns convey the business owner’s personal story and their reason for doing what they do. This process is very similar to writing a business plan.
Marketing the Campaign
Creating a crowdfunding campaign is just the first step. You’ll also likely need a plan for marketing it to reach people who may be interested in supporting your business. Your “investor” is anyone who chooses to donate money to your campaign (and who is also probably your company’s target audience). Crowdfunding investors or donors can choose to fund a business or project because they want early access to a particular product, but many simply do it because they want to help.
Depending on the type of business you run, some ideas to market and promote your campaign may include:
• Spreading the word on your company’s website and social media channels
• Using promoted posts on social media
• Doing interviews for online blogs, podcasts, or other media
• Attending conventions, business fairs, or local community events
• Distributing flyers, pamphlets, or other promotional materials in your community
Reaching the Target Goal
Reaching your target money goal (or getting as close to it as you can) is the last phase to crowdfunding. Depending on which crowdfunding platform you choose, you may or may not get to keep the money if you don’t actually reach your goal. Be sure to pay attention to these details before you choose a final platform.
However, some companies use crowdfunding not just as a source of money, but also as a way to test the market and get valuable feedback. You may be able to find out if there’s a demand for your business and what people like and don’t like about it.
Recommended: How Much Does It Cost to Start a Business?
Different Types of Crowdfunding
As a business owner, you usually have access to four basic types of crowdfunding: equity crowdfunding, donation crowdfunding, reward crowdfunding, and loan crowdfunding.
Equity Crowdfunding
With equity crowdfunding, you’re usually selling a portion of your company in exchange for money at a later date. This means that whenever your company is profitable, a portion of your profits must go to your investors. This type of crowdfunding does come with some legal tight ropes to walk across, but it can be done.
Donation Crowdfunding
Donation crowdfunding is when a person donates money to your crowdfunding campaign without expecting anything in return. They do so because they respect your business or cause and want it to succeed.
Though donation crowdfunding sounds like the best, it may be the hardest to do well in. Generally speaking, people who are successful with this type of crowdfunding are usually with a charity or tackling a social issue.
Reward-Based Crowdfunding
With reward-based crowdfunding, contributors receive a sort of reward for contributing money. This type of crowdfunding is also called exchange crowdfunding and the reward often varies based on the amount of money that is given to the campaign.
Businesses may send contributors the new product for which they’re raising funds. One of the more famous examples of this is when the Japanese game maker Yu Suzuki started a Kickstarter campaign to raise money to develop a video game, Shenmue 3. As part of the campaign, certain contributors received a copy of Shenmue 3. He originally asked for $2,000,000, but he instead raised $6,333,295.
Loan Crowdfunding
Loan crowdfunding, also known as peer-to-peer lending or marketplace lending, is when a person or company borrows money from a group of people as opposed to a bank or credit union. The money is to be paid back by agreed upon dates and interest levels. Crowdfunding business loans may offer lower interest levels than traditional small business loans, and there is not as much red tape to work through.
Do You Pay Back Crowdfunding Money?
Whether or not you are expected to pay back crowdfunding money depends on which type of crowdfunding for small business you choose.
Equity Crowdfunding: With this type of crowdfunding, investors aren’t repaid for their specific contribution. Instead, they become shareholders in the company, earning a proportionate slice of equity in the business venture. So as the company grows, you’ll be required to share a portion of your profits in dividend payments with your shareholders as long as your business is in operation.
Donation Crowdfunding: You do not have to pay any money back received in a donation crowdfunding campaign. In this type of campaign, money is typically given without any expectation of a return.
Reward-Based Crowdfunding: You are not required to pay back any money in an exchange crowdfunding campaign, but you are expected to send your funders an agreed upon reward once it is ready.
Loan Crowdfunding: With loan crowdfunding, you are expected to pay back any money you receive. Payback dates and interest levels are agreed upon beforehand.
Regulations of Crowdfunding for Startups
Under new rules from the Securities and Exchange Commission (SEC), startups can raise up to $5 million over a 12-month period through crowdfunding without undergoing the SEC’s registration process, which can be a complex and cumbersome process.
Small- to mid-size companies engaged in a first-time equity offering can raise up to $75 million over a 12-month period while remaining exempt from SEC regulation requirements.
Pros and Cons of Crowdfunding for Small Businesses
As with all methods of financing, crowdfunding comes with its pros and cons.
Pros of Crowdfunding for Small Businesses
Here are some advantages of crowdfunding:
• It can be a great way to test the market. If you have a business idea but you’re not sure if the market will respond to it or not, crowdfunding allows you the opportunity to turn it into a proven concept. However, if your campaign doesn’t reach a lot of investors or supporters, then it may be a sign you need to pivot your business strategy and idea.
• The market finances your business or product. You’re not typically taking unnecessary risks with your finances. Instead, the market is taking most of the financial responsibility.
• It can create buzz and excitement about your product. A successful campaign will generate awareness and excitement over your business and product, accelerating your past competition and years of struggle.
• It could help you raise more than you expect. It’s possible to raise more money than you originally requested. It’s rare, but it does happen for some businesses. This is why it is so important to put everything you have into your campaign.
Cons of Crowdfunding for Small Businesses
Here are some of the disadvantages of crowdfunding:
• It’s not as easy as it sounds. It’s a lot of work to launch a successful crowdfunding campaign. It’s not as simple as signing up and telling people how much you need. For example, many successful campaigns usually end up spending money on marketing and getting a professional to shoot their video.
• You have to find a way to reach contributors. Whatever platform you use to crowdfund typically isn’t going to advertise your campaign or make sure it reaches the right investors; this is up to you.
• You may not get the money if you don’t meet your funding goal. With crowdfunding, you typically have to raise a certain amount of money by a certain date or you may not be able to keep any of the funds.
• Competition can be stiff. Depending on your industry and niche, you may have thousands of campaigns to compete against.
| Pros of Crowdfunding | Cons of Crowdfunding |
|---|---|
| Low financial risk | Requires large amounts of time and effort |
| Increased brand awareness | Saturated market |
| Free marketing | Potential for little to no gain |
| Option to test the market prior to launch | Competition from other campaigns |
Alternatives to Crowdfunding
While crowdfunding can be a unique and exciting way to fund your business, it isn’t for everyone. Here are some other ways you may be able to raise capital to start or grow your small business.
Small Business Loans
More established businesses can apply for small business loans through banks, credit unions, and online lenders. Small Business Administration (SBA) loans may also be available if you have trouble qualifying for traditional financing. The SBA also offers microloans for startups.
Venture Capital
Venture capital, also known as VC funding, is a type of equity financing provided by private investors to startups and small businesses that anticipate high growth and a need for significant funding to sustain that growth. In return for their investment, venture capitalists typically take a percent of ownership in the company.
Angel Investors
Finding angel investors is another potential avenue for small business financing. An angel investor is typically a high-net-worth individual who offers financial backing for small startups, typically in exchange for ownership equity in the business. Angel investors could be knowledgeable and wealthy industry experts, but they might also be just friends and family who want to help.
The Takeaway
Crowdfunding has become a valuable tool for small businesses to raise capital, validate their products, and engage with potential customers. By leveraging platforms like Kickstarter or GoFundMe, entrepreneurs can secure funds without traditional loans or investors.
In addition to crowdfunding, other options for raising capital include venture capitalists, angel investors, and small business loans.
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.
FAQ
Is crowdfunding good for small businesses?
Yes, crowdfunding can be good for small businesses as it provides access to capital without needing traditional loans or investors. It helps validate ideas, engage early customers, and build brand awareness.
What is the best crowdfunding platform for small businesses?
The best crowdfunding platform for small businesses depends on the business’s goals. Kickstarter is ideal for creative projects with a reward-based model, while Indiegogo offers flexible funding options. GoFundMe is great for personal or community-driven causes, and EquityNet supports equity crowdfunding for businesses seeking investors.
Do you pay back crowdfunding?
In most crowdfunding models, such as reward-based crowdfunding (Kickstarter, Indiegogo), you do not pay back the funds. Instead, backers receive rewards or products. However, with equity crowdfunding, like on EquityNet, investors receive shares in the business. Crowdfunding typically doesn’t involve repayment like traditional loans.
Photo credit: iStock/Dragon Claws
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