You have likely come across this article while trying to answer the question, “What is crowdfunding for small business?” While the concept has a long history, it has only been in recent years that crowdfunding has gained popular attention. In essence, an entrepreneur, small business, or anyone with an idea can raise project funding from large groups of individuals and organizations who make small money investments. These backers often pledge small amounts and will sometimes receive a reward as their return or in appreciation.
Crowdsourcing allows a person to start their dream business or project without giving away any or significant equity to third-party investors. Nevertheless, while some would consider this a free way to raise capital, it does come with some challenges. Backers are very intelligent and will carefully assess an idea’s value. So, it is often difficult to come up with an idea that generates enthusiasm and will attract funding. Backers are also very skeptical of project starters and their legitimacy.
Additionally, just like other businesses, crowdfunded projects have a high rate of failure. Moreover, there are very few regulations that protect backers. If a project goes under or turns out to be a scam, there is almost no recourse. So, backers tend to be attracted to projects that are very transparent and provide a lot of information. Nevertheless, even great ideas can fail to garner attention. Like many things on the internet, crowdfunding relies heavily on going viral.
How Does Crowdfunding Work?
The fundamental concept behind crowdfunding is democratizing capital investment. Until recently, financing of a new business meant asking a small number of people for large amounts of money. Crowdfunding flips the script. Using the power of the internet, entrepreneurs can ask thousands or millions of people for small amounts. So, if a bank or traditional investor turns you down, you can now to make your pitch to the greater public. Once the exclusive domain of the wealthy, virtually anyone can now invest in a new business venture.
This gives small businesses and entrepreneurs access to funding like never before. Furthermore, the backers can choose from investing for monetary gain to donating to a community or cause-based projects for the greater good. Regardless, a successful crowdfunding campaign will require a great idea or good cause combined with viral marketing and targeting the right crowd. A good crowdfunding campaign can also generate a lot of buzz and excitement about the launch of a new product or service.
Common Types of Crowdfunding
- Reward-based – In exchange for their investment, a donor receives a product or service. Think along the lines of a PBS fund drive and their membership rewards. My favorites were always the Dr. Wayne Dyer giveaways.
- Equity – In this form, the project backer is buying shares of the company. Much like buying company stocks on Wall Street, contributors are betting on a company’s future success and hoping for a significant return on their investment.
- Debt-based – Also known as crowdlending or peer-to-peer lending, a business can receive a loan funded by multiple individuals and organizations. Typically, these types of loans provide more favorable interest rates than a traditional bank or lending institution.
- Donation-based – While not applicable to for-profit businesses, this type of crowdfunding is fundraising for charitable causes, which can run the spectrum from helping a displaced family to starting a not-for-profit organization.
Which Are the Best Crowdfunding Sites?
Since crowdfunding is a project creator asking unknown people for money, it requires an intermediary. There are thousands of crowdfunding websites, and new ones created every day. It is important that project creators perform due diligence and use caution before selecting a platform. Different platforms will have different restrictions and fees. Additionally, success will often rely, at least in part, on the crowdfunding platform’s own reputation. Moreover, these sites are typically selective about the kinds of projects they will accept. However, even with an accepted project, your campaign may struggle because of the types of people who visit the site.
Here are some of the top crowdfunding sites:
- Top Reward-based Crowdfunding Sites
- Indiegogo – Initially known for funding independent films, Indiegogo allows project creators to petition funds for almost any idea, charity, or startup.
- RocketHub – Another platform initially focused on the arts, RocketHub is for entrepreneurs, scientists, philanthropists, as well as musicians, filmmakers, and photographers.
- Kickstarter – Launched in 2009, Kickstarter focuses mainly on creative projects such as comics, design, fashion, video, food, games, music, technology and many others.
- Top Equity Crowdfunding Sites
- Grow Venture Community – It is known for being one of the first platform specifically dedicated to entrepreneurs and investors. The Grow Venture Community has become a global leader in the technology used to enable banking and financial services.
- MicroVentures – Billed as the “investment bank for startups”, MicroVentures will help entrepreneurs raise capital from angel investors. Yet, this is only after performing their own due diligence. Moreover, it is the only major crowdfunding platform registered by the Financial Industry Regulatory Authority as a broker-dealer.
- AngelList – While it is a platform for startups to raise money, job seekers, and angel investors, AngelList seems to work more like a professional social network than a financial platform.
- Top Debt-based Crowdfunding Sites
- Funding Circle – A marketplace for peer-to-peer lending, Funding Circle exclusively focuses on small business and operates in the US, UK, Spain, Germany, and the Netherlands.
- Lending Club – A peer-to-peer lending company, Lending Club was the first of its kind to register offerings as securities with the Securities and Exchange Commission (SEC). Even so, they provide business loans up to $300,000 and personal loans up to $40,000.
- Upstart – Founded by former Google executives, Upstart utilizes artificial intelligence and machine learning to price credit and automate the borrowing process. However, their lending is not limited to starting or expanding a business. Also, one can apply for a loan for personal reasons, like debt consolidation or paying medical bills.
What are your opinions about crowdfunding? If you would like to talk more about crowdfunding for small business, or a related topic, please share your thoughts and questions in the comment section below.