Thanks to the emergence of platforms such as Seedrs and Kickstarter, crowdfunding has become a popular method for startups to raise funds.
If you’re thinking of using crowdfunding to raise investment for your startup, there are a few things you need to know first to understand how Crowdfunding works.
In this article, we’ll look at what crowdfunding is, the different crowdfunding methods available, and the pros and cons of each.
Crowdfunding is a way for people or companies to raise money without involving banks or conventional lenders. The ‘crowd’ in this case are the investors that provide the capital.
Startups looking for crowdfunding investment join up to an online crowdfunding platform where they can make their pitch. A crowdfunding campaign page is like a pitch deck explaining why investors should fund your project, often with the help of videos and graphics. Different crowdfunding platforms operate in different ways, as we shall see in the next section.
Crowdfunding projects are usually time-limited – if you cannot hit your fundraising target by the project expiry date, you do not receive any money.
Broadly speaking, there are two types of crowdfunding – equity and reward-based.
In equity crowdfunding, startups give away a percentage of their company equity in exchange for investment.
Reward-based crowdfunding is when investors donate their money in exchange for rewards. Startups provide incentives to invest in their projects, such as being the first to receive a product, or a deluxe version. Often, startups use a tier system in their crowdfunding campaigns, with various rewards for different levels of investment.
Crowdfunding is an option for startups looking for investment, but it’s by no means the only one. Starting a crowdfunding campaign is a big decision as it involves a lot of work. It is not one-size-fits-all. There are pros and cons to crowdfunding.
However, crowdfunding is not the perfect solution for raising investment. There are some downsides, including:
If you’ve weighed up the pros and cons and want to press ahead with crowdfunding for your startup, you need to consider which method is right for you and your business – equity or reward-based crowdfunding. Again, both have their upsides and downsides.
Equity crowdfunding offers startups access to a level of investor that they would not be able to get simply by providing rewards. There are many experienced and proficient investors searching for opportunities on crowdfunding platforms. If you could snare one of them in exchange for equity, it could make all the difference to your business. Equity crowdfunding is also the best way to get large sums of money. You are unlikely to raise six or seven-figure amounts by offering rewards. Also, some platforms pool investors, so you have one point of contact rather than managing several investors who all want to have their input. This makes investor relations much more straightforward.
On the downside, if you want to achieve your equity crowdfunding targets, you will have to post your financials and your business plan on your platform crowdfunding page. Some startups will not be comfortable doing this. Some may also be reluctant to give away equity at an early stage in their business’ life.
Reward-based crowdfunding is popular because it is access to cheap money. There’s no interest rate and you don’t have to give away equity stakes. You receive donations in exchange for rewards – and your rewards should be easy to provide. You can also use reward-based crowdfunding as a form of marketing to build interest in your future projects.
However, there are disadvantages to reward-based crowdfunding. If you hit your target, you have to actually follow through and provide the rewards. You cannot let your funders down. On the other hand, if you don’t hit your target, you have put in a lot of work for nothing.
Quantico already helps a massive number of startups pre and post-funding. We have vast experience in getting companies ready for funding, as well as advising them on the best funding pathways so that they can maximise their wealth and control over their company.
Visit our site today to find out more