What is crowdfunding
Types of crowdfunding
Like other organizations, businesses can use crowdfunding to raise capital for their venture. When we define crowdfunding in business, we mostly think about startups, angel investments, and transactions outside of the traditional financial institutions. Put simply, crowdfunding for business presents a great opportunity for startups to source a large group of investors efficiently.
Crowdfunding opens early stage investment for innovative companies with diverse teams and a social mission, while also empowering the masses to not only actively fund the companies they believe in, but also benefit from that growth.
Popular Crowdfunding Websites
As of 2021, GoFundMe is the largest crowdfunding platform. Since GoFundMe was founded in 2010, the site has raised over $15 billion through more than 100 million donors. GoFundMe is the site most popular for individuals seeking to recover from a medical expense or disaster such as a house fire, natural disaster, or unexpected emergency expense. Start-up companies tend to use Kickstarter.
Kickstarter is another popular choice. As of May 29, 2022, since it was founded in 2009, Kickstarter has successfully funded over 220,000 projects, with more than $6.6 billion pledged across all Kickstarter projects.
Kickstarter is the most popular crowdfunding site for aspiring businesses hoping to raise capital and reach a larger audience. In fact, unlike GoFundMe, Kickstarter can only be used for creating projects that can be shared with others.
Additionally, Kickstarter cannot be used to raise funds to donate to a charity or cause, projects can’t offer incentives like equity, revenue sharing, or investment opportunities, nor can any project involve the site’s list of prohibited items such as “any item claiming to diagnose, cure, treat, or prevent an illness or condition,” political fundraising, drugs or alcohol, or any contests, coupons, gambling, and raffles.
Indiegogo started as a crowdfunding site initially focused exclusively on raising money for independent films but began accepting projects from any category a year after its launch in 2008.
Indiegogo is seen as a less strict and more flexible platform than Kickstarter, as it gives backers control over whether they want fixed or flexible models—this is probably the most significant difference between the two crowdfunding platforms. Kickstarter releases funds only after the campaign has reached its funding goal, whereas Indiegogo allows the campaigner to receive funding pro-rata, or wait until their target is hit.
As a campaigner, it might be easier and less risky to go with flexible funding (i.e., receiving funds as they come); however, regardless of the amount raised, campaigners must still deliver on any promises made. For a backer, fixed funding is more attractive as it is associated with much less of a risk.
What is crowdfunding?
Crowdfunding involves collecting money from a group of donors in an effort to raise capital. Crowdfunding sources can include those who have an interest in your business: friends, family members, investment groups and personal investors. The goal is to attract a large group to your investment to raise the capital you need for your business venture. Crowdfunding typically occurs online through dedicated platforms.
Do you pay back crowdfunding?
Donation crowdfunding does not require the recipient to pay back the funds. This type is typically more geared to charities and nonprofits. Friends and family members are likely to not expect a return of their funds. Debt-based donations comprise money pledged by backers that is a loan, which you must repay with interest. With rewards-based crowdfunding, tangible items, like free products, are given to individuals who give money to help you start your business. You could structure your rewards based on the size of the donation. For equity crowdfunding, participants receive a financial reward for their investment by owning shares of your company.
What are the pros and cons of crowdfunding?
Key takeaway: If you don’t hit your funding goal, the crowdfunding platform usually returns the money to donors, though some sites let you keep the funds for a fee. Be aware of any processing and hosting expenses as well.
Bennett Conlin and Ryan Goodrich contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.