According to estimates from crowdfunding platform Fundable, crowdfunding was responsible for 270,000 new jobs and an injection of more than $65 billion into the global economy by the end of 2014. The best performing categories in crowdfunding then and now are consumer products and in the tech space.
Not all crowdfunding campaigns meet their goals, though. According to Kickstarter, only 44% of projects posted on the site meet their funding goal. Of the roughly 60,000 unsuccessful projects surveyed, nearly 40,000 failed to reach even 20% of their goal. On other hand, some projects can far exceed their wildest funding dreams. For instance, the Coolest Cooler aimed for $50,000 and raised more than $13 million.
It’s hard to predict which crowdfunding projects will be successful, but 70% of the campaigns that meet or surpass their goal have a professional and comprehensive presentation of the company and what it offers.
One of the factors that can affect the outcome of a crowdfunding campaign is the choice of platform. There are three or four different kinds of crowdfunding categories, depending on the source you use:
• Rewards-based, or donation-based crowdfunding
• Equity, or investment crowdfunding
• Debt crowdfunding
1. Rewards-based crowdfunding
In rewards-based crowdfunding, a large number of backers contribute small amounts of money to a project in exchange for a reward. The rewards increase in value according to the size of the donation – the bigger the donation, the bigger the reward. Kickstarter is the largest rewards-based crowdfunding platform. Indiegogo is another popular rewards-based crowdfunding platform, as are CrowdFunder and RocketHub.
Also known as donation-based crowdfunding, it allows entrepreneurs to pre-sell a product to a large number of backers who each donate a relatively small sum toward the project. To encourage larger donations, the entrepreneur may also offer token rewards of increasing value or significance, while retaining full ownership of the project or company being funded.
Donation-based crowdfunding is also used to raise funds for charitable causes. GoFundMe is the best-known donation-based crowdfunding platform in this segment. Others include, YouCaring.com, GiveForward and FirstGiving.
2. Equity or investment crowdfunding
In equity crowdfunding a large number of people invest in a company in exchange for shares in that company. A backer has partial ownership of a company and stands to profit should the company do well. The opposite is also true – if the company fails, investors can lose some or all of their investment.
Equity crowdfunding is typically used to raise money to fund the launch or growth of a company, not to elicit support for a project or product. Entrepreneurs turn to this type of funding after they have received seed money to start a business by taking loans from banks, family & friends, or by offering equity ownership in return for investment from family & friends or from angel and venture capital investors. Investment crowdfunding allows a startup to seek relatively small investments from a large number of backers when other fundraising options are not available or are too costly. Popular platforms for equity crowdfunding are AngelList, Crowdfunder, SeedInvest, FundersClub, Crowdcube and Seedrs.
3. Debt crowdfunding
Entrepreneurs can also raise money to fund their company through debt crowdfunding. While the debt must be paid back within an agreed upon time, with interest, the company doesn’t have to sacrifice a portion of ownership in the company in exchange for an investment as with equity crowdfunding.
Crowd-based lending allows entrepreneurs more flexibility for their financing needs without the dilution of equity funding. Debt-based lending is an opportunity for small business owners to get financial assistance outside traditional lending institutions like banks by borrowing small amounts of money from a large group of people.
The rates of platforms that provide this service fluctuate depending on the size and length of the borrowing period, with the most favourable terms likely to come from a business owner’s closest circle, including friends and family. Endurance Lending Network is a web-based lending platform that facilitates debts of up to $500,000 for small business owners. Micro-lending platforms such as LendingClub and Prosper also facilitate crowdfunded debt financing.
Crowd-sourced investment or funding is providing a financial lifeline for startups and businesses that traditional institutions have been failing to do. Provided you plan well and choose the right crowdfunding platform, your startup can access financial support and flourish.