01: Introduction to Crowdfunding
Capital raised from the general public via crowdfunding campaigns typically come in one of four categories:
- Reward-Based — Funders provide money in exchange for rewards based on how much they give.
- Donation-Based — Funders donate money to support a cause they’re passionate about.
- Lending-Based — Funders provide money in exchange for a fixed income until the loan has been repaid.
- Equity-Based — Funders provide money in exchange for ownership.
Traditionally, only accredited investors could participate in equity-based crowdfunding. However, with the passing of the JOBS Act in 2013, the SEC has made it legal for entrepreneurs to offer an equity stake to both accredited and non-accredited investors in exchange for their capital investment.
Pros of Crowdfunding
- Crowdfunding offers a gauge on public interest before launching new products and spending large amounts of money on development.
- You may receive more than you intended or asked for. Many successful crowdfunding campaigns have raised as much as 8X their original funding goals.
- You don’t have to be an established company. An individual can launch a crowdfunding campaign with little to no upfront cost. A polished pitch or presentation can be enough to begin raising capital.
- If you fail to reach your goal, you can make adjustments and try again.
- It allows you to test aspects of your company’s marketing approach to see how it resonates with the target market.
- With non-equity based crowdfunding, you keep your equity and maintain 100% ownership of the business.
- You generate interest in projects and may receive pre-orders prior to launch.
- Receive useful advice from financial backers.
- Your backers are enrolled in the business and will help you market and promote the brand.
- Crowdfunding can be used in many industries – from a nonprofit to technology to education
Cons to Crowdfunding
Although there are many benefits associated with crowdfunding, this form of raising capital does not come without its cons:
- Crowdfunding campaigns are public — not only are you opening up your ideas to criticism but your competitors can capitalize on the information put out there.
- A successful crowdfunding campaign involves reaching out to the end consumer and therefore the approach is much different than approaching professional investors, often requiring knowledge of consumer marketing, social networks and social media.
- Some crowdfunding sites require that 100% of your funding goals are met or no funds are collected.
- Crowdfunding is not for all businesses in all industries. It works best for simple consumer products and services and is not as effective for complex business to business ideas or products with lengthy R&D stages. Backers want to see results quickly. The most successful categories include:
- Social causes
- Film, music, and arts
- Physical products
- You are responsible for managing a much larger and more diverse set of backers as compared with traditional investment opportunities.
- You are competing against thousands of other crowdfunding campaigns.