Yes, crowdfunding might be a feasible and ideal way to inject cash into your project, but are you aware of which type of crowdfunding is best for you?
Lately, startups and SMEs have recognized the immense potential of attracting the public to pull small investments from their backers. And it’s not complicated to gather why this trend is and has been on the rise.
Often regarded as a reasonable alternative to other funding options, such as traditional investors or loans, the requirements of securing money through crowdfunding campaigns might not be as stringent or inefficient.
Nevertheless, your crowdfunding campaign can turn out to be disastrous and futile without the proper knowledge. As a starting point, understanding which type of crowdfunding is best for you will go a long way in ensuring the success of your campaign.
Primarily there are four models of crowdfunding entrepreneurs, inventors, or individuals can use for their project. In this detailed showpiece, we will elucidate all these options along with their strengths and possible drawbacks. Consequently, you can make an informed decision to determine the perfect fit for your project.
Which Type of Crowdfunding Is Best for You?
As already outlined, there are four options of crowdfunding campaigns you can deploy to your business. Some offer a financial return for backers, rewards, equity, and others solely depend on the love the public has for your products/services.
1. Donation-Based Crowdfunding
This is the most straightforward and possibly the smallest form of crowdfunding. As the name gives it away, you can raise money by asking many people to donate. Typically through an online platform. Your backers will not receive anything or feel entitled to claim anything even after the success of your project. The individuals who give you the financial backing do it out of support for your cause and goodwill.
Donation-based crowdfunding may not be as prevalent and efficacious in the business realm compared to social causes, charities, and political campaigns. Still, with proper knowledge, an appealing business idea or plan, and notably the perfect platform, this approach can be ideal for individuals pursuing funds.
2. Rewards-Based Crowdfunding
Also referred to as perks-based, rewards crowdfunding entails your backers receiving incentives or gifts to appreciate their support. In most cases, the said reward is usually a pre-order of a unique or new product the owner is trying to launch. It’s worth mentioning that at no instance that the rewards on the table are in monetary form. In summary, this crowdfunding model operates as a sort of pre-sale.
The most exciting and alluring benefit to this form of crowdfunding is that you don’t have to repay the allotted funds or give away any shares of your venture. And, it’s about more than the money. For example, you can receive genuine first-hand feedback regarding your product from your backers before the official launch of your product. Also, you get the chance to create public interest and market your product.
Kickstarter and Indiegogo are some of the largest and most successful reward-based crowdfunding platforms. However, it’s best to scrutinize and gauge a platform’s requirements and model to see if it aligns with your project. For example, Kickstarter deploys an all-or-nothing model whereby you can get hold of the pledged amount if you reach your target funding. As you can imagine, this may turn out to be mortifying and a waste of resources.
Nevertheless, it might not be ideal if you intend on acquiring funds in a short period. Still, some startups and projects still getting off the ground might be overwhelmed by the costs of shipping gifts to their backers.
3. Equity Investment
A more recent add-on to crowdfunding forms, equity-based campaigns allow individuals to own a share of your project. Like a stock exchange or venture capitalist, you will sell a stake of your business/project to several investors in return for funding. Only the process takes place in crowdfunding platforms and the less stringent and streamlined entry criteria for investors and individuals seeking the money. Some recognized platforms are Crowdcube and Seedrs.
This is an ideal strategy for startups and SMEs to raise capital from abroad and various pools of investors. Unlike reward and donation-based crowdfunding, equity crowdfunding can raise substantial fundings with no obligations of repayment. Also, you can benefit from the access to valuable networking opportunities and business acumen your prospective investors bring to the table.
A significant drawback of this model is that it’s a new entry and may not be as popular as the other forms. Also, giving up equity to the extent of playing by the rules of investors may not be appealing to some individuals.
4. Debt Crowdfunding or Market Lending
Akin to traditional borrowing, debt crowdfunding or peer-to-peer lending ( P2P ) allows you to source out funding from interested parties with the expectation of paying it later with principal interest. However, rates offered by these platforms are on the low-end compared to banks and other traditional lending options. Not to mention the strict requirements, lengthy applications, and delayed disbursements of funds from banks.
Still, if you intend to acquire sizeable funding, you will need to meet more rigorous qualifications. Also, it might be more painless to obtain backers with P2P compared to the other forms due to the potential financial returns they will gain.
Projects with already positive traction, low possible risks, and potentially high returns are well suited for this form of crowdfunding. Unfortunately, Lendingclub, the largest P2P platform globally, approves only a tiny percentage, ten percent, of the applications.
Now that you are aware of the various crowdfunding models, you should prioritize making a conscious decision before moving forward with your project. Additionally, knowing the varying fee structures of each platform should be your utmost priority in the decision-making process. Finally, the affluence of your campaign depends on the marketing power you put behind it.