It used to be the case that credit cards, family, friends, bank loans and personal savings were the most popular ways to fund a business startup, and with the most detailed of business plans, an entrepreneur could pitch Venture Capital firms and Angel Investors for funding. This is now all changing as more and more entrepreneurs are turning to the latest option for startups--Crowdfunding.
For those who are unfamiliar, crowdfunding is a means of raising funds from large groups. Kickstarter is probably the best example of crowdfunding. You create your business plan and idea and then upload it to the website with a financial goal in mind, and people can give money toward your goal if they believe in your business. It's easy, and it's a method to keep a close eye on in 2015.
Two Types of Crowdfunding: A Quick Recap
For more information about the basics of crowdfunding, I recommend visiting this article from FirstRound. Once you're ready to get more advanced it's important to consider that there are actually two types of crowdfunding: Receiving Rewards and Equity Crowdfunding.
- Receiving Rewards. This is the traditional way of crowdfunding. It is a system where investors would get a reward in return for their investment. For example, if you donated a certain amount of money to an entrepreneur who was trying to launch a new board game, they might send you the board game as a thank you for your investment.
While this is an easy way to earn a lot of money for your company, the people who receive your "reward" are not technically investors in your business. This means that if your business became a huge success, a rewards-based investor would not earn any of the profits like they would with other, more traditional types of investing. This sometimes causes people to not want to invest, but because they don't have to give a large amount of money, the system still works.
- Equity Crowdfunding. This is the newer way of crowdfunding. As of 2012 and thanks to the JOBS Act, companies are now allowed to collect up to $1 million per year over the Internet, so with this type of crowdfunding those who contribute could become company shareholders. This is a great middle-point between reward-based crowdfunding and the older, traditional way of pitching ideas to investors in person.
According to the Ultimate Crowdfunding Guide from BankingSense, "If you're interested in an equity campaign, your business will need to be incorporated. This way, you can make the most of the freedoms to which the JOBS Act will entitle you--worth noting is that there are no limiatations on how many investors a C corporation can have. On the other hand, however, an S corporation is restricted to 100 shareholders."
If you're on the fence about which type of crowdfunding campaign is right for you and how to get started, I recommend visiting the BankingSense guide for more detailed information.
How Crowdfunding is Changing the Financial Woes of Entrepreneurs
Thanks to crowdfunding, the way that startups raise money now requires a new set of skills that may not have been needed in the past and vice versa. Below explains a few ways that crowdfunding is different than traditional ways to fund a startup:
You don't necessarily have to be a great public speaker or create fancy presentations.
In the past companies had to talk with VCs in person and prepare a Shark Tank type presentation and speech. Presentation was everything, so you had to be able to talk well in front of an audience, stay on your toes to answer questions, and oftentimes hit to road to meet with different investors across the country. With crowdfunding, all of this changes. It's all about being able to present your business well online, and while this takes talent just as much as the "old" way of doing things, it changes a lot for startups.
You have a broader audience of investors.
In the past you likely only had a few investors interested in your company, and in many cases these were not first-time investors. They were people who were considering giving your business a considerable amount of money. In short, as an entrepreneur this gave you a smaller audience with high stakes.
Crowdfunding, on the other hand, is the complete opposite. With crowdfunding, you don't have to find the perfect investors or figure how you're going to appeal to the people you're about to meet--all you need to do is find like-minded people to donate a little bit of money. For some types of companies, this is easier. This then brings me to my next point.
Social media becomes more important when it comes to finding investors.
With crowdfunding, your audience changes. You now have an audience of whomever you want because anyone is available to give any amount of money to your company through a crowdfunding campaign (which goes back to point #2 above). This means that you have to target the right people and make sure that these people know where they can go to see and give to your campaign. For a lot of companies, this can be done through social media. In other words, now you're not only trying to "sell" your business, but you have to actually "sell" the idea of crowdfunding, how it works, and where to find it.
Investors can interact with each other and watch your campaign grow.
Those who have worked with investors or been investors themselves know that sometimes it's easy to sit on the fence and see what other investors do. As an entrepreneur it can be hard to get the ball rolling, but with a crowdfunding campaign you can easily see how much money has been raised, as you can see from some of the examples below.
A Few Crowdfunding Sources
The best way to understand how crowdfunding changes to the game for startups is by looking at a few crowdfunding campaigns online. Below are some of the most popular crowdfunding sites:
Kickstarter. This is probably the most popular crowdfunding website and has been going strong since 2009. Check out this article from John Rampton on Inc. that discusses some of the craziest Kickstarter ideas that got funded.
Crowdfunder. This website only began operating in 2012, but it has gained some traction over the last few years thanks to it's business model. With Crowdfunder, people can purchase stakes in companies as opposed to specific rewards. You can create a profile for free, but to begin earning funds for your company you pay a monthly membership fee that ranges in price.
Indiegogo. This website is probably the best for creative projects and those interested in the arts. They do take a cut of your earnings, but if you can meet your goal you'll get almost all of them back. In my opinion, this is a good option if the Kickstarter or Crowdfunder audience wasn't working for you.