Crowdfunding

Crowdfunding is a specific method of raising capital to fund a business venture. It’s a collective effort that can comprise any of the following people:

• Friends
• Family
• Current and/or future customers
• Investors

One of the most attractive things about crowdfunding is that it puts your brand in front of a large pool of individuals (providing that you market it well) and demonstrates how many people are or would be interested in purchasing your products.

Crowdfunding campaigns typically gain the best traction when you launch them alongside a social media marketing strategy. That’s in addition to promoting yourself on actual crowdfunding platforms themselves like Kickstarter or Indiegogo. By leveraging all these networks, you’re far more likely to gain more exposure.

Crowdfunding is far from the traditional method businesses use to secure finances. Historically, if you needed to raise capital, you would need to present your business plan, market research, prototypes, etc. to a limited pool of investors and institutions such as:

• Banks
• Angel investors
• Venture capital firms

That was pretty much the only option. Pretty limited, right?

This is where crowdsourcing platforms come into play. They’re effectively a fundraising funnel for your business. You’re literally given a virtual stage to showcase, share, and pitch your resources to anyone willing to listen!

Needless to say, this is much quicker than sifting through your personal network, contacting and vetting potential investors, and spending time and money pitching them.

The Benefits of Crowdfunding

Here are a few benefits of raising capital through crowdfunding:

• Reach: As we’ve already said, crowdfunding platforms allow you to extend your reach.
• Marketing: A crowdfunding campaign gives you, your brand, and your products a lot of exposure and hype—if you execute your strategy well.
• Validation: Presenting your business idea to such a broad audience allows you to validate and refine the concept of your business. As investors start asking questions, you’ll soon see what’s holding prospects back from parting with their hard-earned cash.

The Types of Crowdfunding

There are a few different kinds of crowdfunding to choose from and the type you select comes down to the sort of products and/or service you’re offering, plus what your targets for growth are.

On the whole, there are three mains types of crowdfunding that we’re going to break down for you:

• Donation-Based Crowdfunding
• Rewards-Based Crowdfunding
• Equity-Based Crowdfunding

Donation-Based Crowdfunding

As the name suggests, the donation-based crowdfunding model is a lot like giving to charity in the sense that investors don’t expect any kind of financial return on their investment. So, unsurprisingly, the types of initiatives that utilize this kind of crowdfunding tend to be organizations raising money for things like disaster relief, charities, scientific and medical research, nonprofits, and medical bills.

Rewards-Based Crowdfunding

Again, as you may have guessed from the name, rewards-based crowdfunding is where investors make a financial contribution to a business venture in exchange for some kind of “reward.” Most commonly, the reward is the product or service (or a version of it) that the funds are being raised for. The benefit of it is that it allows entrepreneurs to incentivize investors without the headache of extra expenses or selling shares in their company.

Interestingly, even though backers gain something for their money, rewards-based crowdfunding is considered by many in the industry as a subset of donation-based crowdfunding. This is because investors still don’t expect either a financial or equitable return for their money.

Rewards-based crowdfunding is popular on platforms like Kickstarter and Indiegogo.

Equity-Based Crowdfunding

Out of all three of these crowdfunding types, this option is the most intense. Equity-based crowdfunding enables investors to become a part-owner in your business. Investors pay you in exchange for equitable shares in your enterprise. Then, as equity owners, your investors enjoy a financial return on their investment.