What is "crowd funding"?

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.

What is crowdfunding?

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.

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Different methods of crowdfunding

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.

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Advantages of crowdfunding

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.

Advantages include:

• It can be a fast way to raise finance, with no upfront fees. Platforms take a percentage of the money raised
• You can raise investment with ideas that may not appeal to conventional investors. If you can capture the crowd’s imagination, you can find success
• If you have struggled in the past to get bank loans or traditional equity funding, crowdfunding can be an attractive alternative finance option
• Crowdfunding is an effective way to gauge the public’s reaction to your idea
• When you pitch your project or business on a crowdfunding platform, it can be a valuable marketing channel. You may even get attention from the media
• With crowdfunding, the demands from investors are not always as aggressive as they are from other forms

Disadvantages of crowdfunding

However, crowdfunding is not the perfect solution for raising investment. There are some downsides, including:

• Crowdfunding isn’t easy – and may not necessarily be a more straightforward process than traditional ways of raising finance
• Not all projects that apply to crowdfunding platforms are accepted and asked to join
• Once you are on your chosen platform, you need to do a lot of work to build up interest before launching your campaign. This could require significant amounts of money and time
• You won’t receive the same levels of expertise that might come from other methods of funding
• If your project fails, it could damage the reputation of your business to the people who pledged money to you
• If you don’t reach your funding target within the time limit, any money you raise will usually be returned to your investors and you receive nothing. It’s a lot of work for no reward

Which type of crowdfunding is right for me?

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 can help you

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