Crowdfunding is one of the newer ways to fund a business, and In recent years it’s become a popular choice when it comes to raising money for startups. You probably heard of it, but do you know how it works? If not, we’ve got you! Here is a short guide to how you get started with crowdfunding your startup. Let’s start from the top!
What is Crowdfunding?
As opposed to raising a large amount of money from a few sources, you’re raising small amounts of money from a large number of sources, which doesn’t just provide you with funds, but a validation of your product as well. Take a look at Play-i, who invented robots for teaching kids how to code. When initiating their crowdfunding campaign, they set a goal of $250k, which they reached within four days. At the end of their one-month campaign, they raised $1.4 million and got 11.000 pre-orders from people living in 80 different countries. Before the crowdfunding campaign, they simply had a prototype, and the funds they raised allowed them to put the prototype into production. Now that’s what we call validation.
Crowdfunding doesn’t only apply for startups but is also used to raise money for social projects in local communities, for private projects such as publishing books or paying for medical bills, and for support of sports activities - just to name a few! When it comes to crowdfunding, there are three players: The project managers (the startups searching for funds), the contributors (the ones providing funds), and the platforms facilitating the connection between the two.
There are a few different crowdfunding options for a startup: Reward, donations, and equity funds.
Crowdfunding by receiving donations is free funding, which is music to most entrepreneurs’ ears. However, the downside is that startups rarely are able to raise a significant amount of money by donations. If you are a local startup or a startup with a social or environmental impact, it might still be worth a shot, as people tend to support local or impactful causes.
Reward crowdfunding is a better option for most startups, as you will be pre-selling your product or rewarding your contributors with a token of appreciation. This could be as simple as a beautifully designed t-shirt with your logo on it. Most crowdfunding platforms allow you to upload several products so that contributors can choose the one they want. That’s a great way to do it if you’re going to reach as many people as possible, as you can offer a product for each gender, age, skin type, or whatever is relevant in regards to your customer segments.
Equity crowdfunding is a way of funding your startup through multiple investors, each providing a bite of the cake. Because your investors, in return for funding, are provided with shares, it’s a part of the capital market, which means that it’s often subjected to financial regulations depending on in which country your startup is founded and the nationality of the crowdfunding platform. Since the process of selling equity is much more complicated than accepting a donation, you should make sure to think it well-through and preferably seek guidance from a lawyer. The platforms moderating equity crowdfunding are, however well trained, and will guide you through the process.
How to Get Started with Crowdfunding?
First things first. Before we get to the "how”, there are a few things to be aware of when choosing a crowdfunding platform:
All-or-nothing vs. Flexible funding
Some platforms run with an all-or-nothing policy, which means that you only get your funds if you reach your full funding target. However, on many sites, you will find an option for flexible funding, where you get your funds no matter if you hit your desired target or not.
Ability to over-fund
Some platforms allow you to over-fund. That means that your campaign will continue running for the scheduled timespan even if you’ve reached your target. It results in you getting more funding than you need. Sounds nice, right?
Many platforms pre-approve the campaigns before putting them online. Of course, that makes it harder to get a campaign going, but in many ways, it’s a positive thing, as the quality of the projects on the site will be higher. However, you should make sure to read carefully about the application process, as you will need to provide the platform with a lot of information.
Most crowdfunding platforms take a percentage of your funds. It can be anything from 3-15%, depending on the solution you choose. Besides their cut, there’ll be a transaction fee of a few percentages. Other platforms take a fixed fee, and a few are free (apart from the transaction fee). Make sure to include those expenses in your funding goal!
When you’ve chosen the right platform for your startup, there’s nothing left to do but start creating your campaign. As you now know, you’ll need to get pre-approved at some platforms. It mainly applies to equity crowdfunding. However, on many sites, you simply register and create your funding campaign with a few simple steps:
- Set a goal
Before you get started, you need to set a goal and a duration for your campaign. As we said above, some platforms have a policy stating that you can’t get your funds if you don’t achieve your goals, so don’t overdo it. When that’s said, you shouldn't under-do it either - when people invest in a project, they expect to see it through. There's no need to get funds if they are not enough to get you going.
- Stand out!
Most crowdfunding platforms have thousands of projects, so for your startup to stand out, you need to make one hell of a presentation. Basically, it’s your pitch, but with even more visuals. And remember who your crowd is; unless you're going for equity funding, it’s regular people you need to convince, so use some ‘pathos,’ and speak to the heart.
- Promote yourself!
While the crowdfunding platforms promote the projects on their site, their focus will be spread across the width. The more you promote your campaign, the more likely you are to succeed. Spread the word!
- Collect your funds
The campaign is over, and you’ve hopefully reached your target. All that’s left to do is to collect your funds and get started.
Before you're ready to embark on your crowdfunding venture, you need to choose your campaign platform. We’ve collected a list of all of the best crowdfunding platforms in 2021 and divided them into groups. Trust us; the one for your startup will be on it!
Crowdfunding by donations & pre-sale
Another new and exciting option of funding your startup is to do crowdlending. You’re probably smart enough to have figured out that while crowdfunding provides funding from multiple sources, crowdlending provides loans from multiple sources. Instead of providing investors with equity, you pay back the loan with interest.