If you’re looking to get your business off the ground, there are plenty of ways to fund it. From business partners to angel investors to traditional loans, there are financing methods to meet virtually any business need.
Although it’s relatively new as an alternative way to raise money for a business, crowdfunding has grown to become a highly popular option in recent years. In 2021, the global crowdfunding market was worth $12.27 billion, and that’s expected to double by 2027. In the U.S. alone, crowdfunding platforms raised over $73 billion in 2020.
It may be all the rage, but what is crowdfunding? And is it a good option for your business? Let’s take a look.
What is crowdfunding?
Crowdfunding is a type of grassroots fundraising that’s taken off in the age of the internet. With crowdfunding platforms, businesses can raise money from a large number of people. In other words, crowdfunding leverages the power of friends, family, and social media networks to pool together small “investments” from a crowd of people.
A business can create a crowdfunding campaign for a specific project or for its entire business launch. It’s really up to you as a business owner to decide what you want to fund and how much it will take to reach your goals.
How does crowdfunding work?
The exact details vary depending on the platform and type of project, but the basics of how crowdfunding works are essentially the same regardless of these choices. Through a platform like Kickstarter or Indiegogo, you create a campaign, set a target funding amount and date, and choose any reward levels you want to offer those who buy in.
On some platforms, most notably Kickstarter, campaigns are “all or nothing.” That means funders are only charged — and your business only receives funding — if you meet your crowdfunding goal. Other platforms offer more flexibility, so you’ll still get to use the funds raised even if your campaign falls short of the intended amount.
Traditional businesses typically offer some sort of reward for “investing.” Supporters who give more might earn bigger rewards. If you’re funding a specific project, your supporters might be the first ones to get access to the new product you’re making.
In some cases, crowdfunding can be more like traditional investing, in which funders earn a portion of equity in your business in exchange for their investment. The method you choose depends on the nature of your business and the project you’re seeking to fund.
Pros and cons of crowdfunding
There are plenty of great reasons to choose crowdfunding to launch a business or a new product. That doesn’t mean it’s right for everyone, though. Here are some of the major pros and cons of crowdfunding.
- A different way to get capital: Finding funding for your business can be a challenge. Crowdfunding allows you to rely on support from a large network rather than trying to find a major investor or go through the process of getting a loan.
- Low-risk option: In general, crowdfunding is less risky than a traditional business loan. Even when you take on a debt to your funders in the form of delivering a product, you’re not risking any collateral or putting your personal financial future on the line.
- Engages a broad base of supporters: Maybe you don’t have the collateral needed for a traditional loan or the financial backing of a major investor. Crowdfunding lets you leverage your network and the power of social media to fund your business with a broad base of support.
- Opportunity for feedback: Traditional fundraising avenues can’t give you the type of broad, direct feedback that crowdfunding can. When you launch your campaign, you’re essentially testing your concept on real customers right out of the gate.
- Builds excitement: Engaging your customer base in this way — and this early — builds anticipation and excitement that can translate into sales when your business or product finally launches.
- Requires intensive marketing efforts: You may not have to spend your time meeting with potential investors or bankers, but successful crowdfunding still requires you to create a polished campaign complete with compelling images, copy, and video. Crowdfunding requires extensive marketing communication efforts — the average successful campaign takes 11 days to prepare and lasts for nine weeks.
- Presents logistical challenges and risks: It sounds so easy, right? It’s anything but. Many businesses underestimate the time, effort, and costs involved in fulfilling their promises to their funders. Even if your campaign is more successful than you expected, you risk frustrating people by taking too long or delivering a poor product because you weren’t prepared.
- Relies on a large network: Crowdfunding can’t succeed unless you cast a large net. The average successful project has over 300 backers, so you’ll need to get the word out to quite a few more people than that.
- Not ideal for major investments: The Crowdfunding Center reports that the average crowdfunding project raises about $107,000. That’s not bad, but it’s also not enough for many business launches or major new projects.
- Funding may not happen: As exciting as crowdfunding sounds, the reality is that most campaigns fail. Data from The Crowdfunding Center shows that only 24.3% of projects are fully funded. If you’ve been dreaming of starting a business for years, those odds might make you reconsider the crowdfunding approach to financing your business.
Which crowdfunding site is the best?
If you decide to move forward after weighing the pros and cons of crowdfunding, there’s an obvious question: which crowdfunding site is the best? As it turns out, choosing the best crowdfunding site is less about the platforms themselves and more about your specific needs. For example, the best crowdfunding site for startups might be different from the best crowdfunding site for an established business looking to launch a new product. Because there are so many options out there, we’ll take a closer look at what many consider to be the top three: Kickstarter, Indiegogo, and SeedInvest.
What is Kickstarter?
Kickstarter may not have been the first crowdfunding website, but it’s certainly become one of the most successful. Since its founding in 2009, Kickstarter has successfully funded more than 211,000 projects with 20 million different backers.
How does Kickstarter work?
Kickstarter projects are started by “creators” and funded by “backers.” Creators set a funding timeline and target, and the campaign is all or nothing. If creators don’t hit the funding goal by the established date, the project doesn’t fund. Provided the campaign hits its targets, backers will receive different levels of rewards based on how much they pledge.
You may be wondering how much Kickstarter takes for this service, and it’s an important question. Kickstarter fees amount to 5% taken from the total funds once a campaign is fully funded, but the company’s payment processor will also take between 3% and 5% from each payment made by a backer.
The company has funded a wide variety of companies and projects since its launch. Some of the most successful Kickstarter projects include tech gadgets, board games, music, and household items.
What is Indiegogo?
Indiegogo was the first major site to launch crowdfunding in the form we know it today, and it continues to be one of the most successful platforms around. Since its launch in 2008, it has helped fund more than 800,000 projects with more than 9 million backers.
How does Indiegogo work?
Generally speaking, Indiegogo is a broader, more open platform than Kickstarter. It has less strict rules about the types of projects you can fund, and companies and creators have launched everything from major films to micro-drones. Indiegogo does not have an all-or-nothing campaign requirement, and you also have the option to allow investors to earn actual equity instead of the rewards favored by Kickstarter. In addition, Indiegogo offers a wider array of helpful support for its creators, including expert guidance and educational services.
Indiegogo fees are similar to those found on Kickstarter, with a 5% project fee and transaction fees of around 3% for each funding transaction. There are also transfer fees when Indiegogo sends funds to your bank account.
What is SeedInvest?
Unlike Kickstarter and Indiegogo, SeedInvest is built around equity crowdfunding. It launched in 2012 after Congress passed the JOBS Act to allow businesses to seek traditional equity investing through crowdfunding platforms.
How does SeedInvest work?
Through SeedInvest, businesses can connect with venture capital firms, angel investors and institutional investors. It’s a highly selective platform — only around 1% of companies that apply are ultimately listed. Those that make the cut, however, can get access to a lot of capital. The average investment is $975,000, and the largest investment round so far has been for $20 million.
SeedInvest reviews are generally positive for investors with a longer time horizon, and the companies that are accepted can get access to major funding for their business. Nothing is free, however, and companies pay a 7.5% SeedInvest placement fee in addition to a 5% equity fee upon successful funding.
Is crowdfunding right for you?
At Lendesca, our goal is to help you fund your small business dreams — whatever path you might choose. Crowdfunding has helped many companies get started, and it’s certainly established itself as a viable business financing option. At the same time, it’s not without its flaws, and many small business owners find that the fees imposed by crowdfunding platforms along with the significant risk of not reaching funding goals push them to seek financing elsewhere.
Sometimes it’s better to go with tried-and-true methods to ensure you can get the capital you need at the time you need it. If you’re interested in more traditional financing, look to Lendesca for a host of great loan products for your business. Curious about your options? Reach out today to see what we can do to help you get started.