Crowdfunding is becoming an increasingly popular way for startup businesses and more mature firms to raise money. It seems easy: just sign up with a high-qualitycrowdfunding platform, list your funding needs, click a few buttons, and your money appears.Of course, raising money for your business via crowdfunding isn't that easy. Learn the pros and cons of crowdfunding before you launch your next campaign.
Key Takeaways
- There are two main types of crowdfunding, and each has its own pros and cons.
- Rewards-based crowdfunding is great for building a loyal following, but some platforms may not let you access any of the money you raised if you don't hit your fundraising goal.
- Equity crowdfunding can bring in millions of dollars, but you'll have to trade away equity in your company to get the money.
- Running a successful crowdfunding campaign requires a lot of planning, energy, and dedication—money rarely appears with little effort.
Pros and Cons of Rewards-Based Crowdfunding
Sites like Kickstarter and Indiegogo are called rewards-based crowdfunding platforms because companies or people who fundraise on them provide incentives to donors who donate their money to worthy projects or companies.
For example, if you're developing a new type of tent, you'll offer your donors various incentives based on how much they donate. If a donor gives $50, they'll get early access to purchase the tent, along with an insulated mug. If a donor gives $350, they'll get a tent when the product launches.
Pros
Access to "cheap" money
Pre-funding your next product
Cons
Pressure
Potentially a lot of work with little payoff
Pros of Rewards-Based Crowdfunding Explained
- Access to "cheap money":Using rewards-based crowdfunding, you're raising money for your project or business without selling off an equity stake in your business. These are donations. Also, you get tens,hundreds, or even thousands of people committed to the success of your campaign—that can be really valuable.
- Pre-funding your next product:This type of crowdfunding is a great way to lay the groundwork for your next innovative project. You've already built a network of engaged, enthusiastic supporters who have gained through supporting your work, and they may be eager to get involved next time as well.
Note
Generally speaking, the average person thinks of crowdfunding, they likely think of rewards-based crowdfunding.
Cons of Rewards-Based Crowdfunding Explained
- Pressure: Once you've successfully raised money, you've got to ship whatever you're producing. The clock is ticking, and shipping late (or not at all) could be a public relations and social media disaster for your company.
- Potentially a lot of work with little payoff: Because of the binary nature of some crowdfunding campaigns (if you don't hit your target, you get nothing), you can wind up spending a lot of time and energy running a campaign that ultimately fails because donations did not break the threshold you set.
Pros and Cons of Equity Crowdfunding
Rewards-based crowdfunding campaigns accept donations in exchange for rewards. It gives average people the satisfaction of helping you achieve your goals. Equity crowdfunding, on the other hand, is when you solicit investors who give you capital in exchange for equity in your company. For example, you launch an equity campaign. An investor says she'll give you $100,000 in exchange for 20% of your company. This type of crowdfunding is also known as "angel investing."
Pros
It's smart money
There are potentially larger sums of fundraising
Easier investor relations
Cons
Increased transparency
"Expensive" fundraising
Pros of Equity Crowdfunding Explained
- It's smart money:By taking angel investing (individuals investing in startups) online, equity crowdfunding has opened up this type of investing to more and more people. There are very accomplished investors using these platforms whose contribution may add to the success of your business long term.
- There are potentially larger sums of fundraising: Venture capitalists that browse equity crowdfunding platforms often have millions of dollars to invest in companies. Rewards-based crowdfunding platforms tend to have much smaller donations. For example, in August 2022, Kickstarter's average donation was around $318.
- Easier investor relations:Managingnumerous investors in your company becomes a very time-consuming job. Instead of raising money from numerous investors, some equity crowdfunding platforms pool the funds they raise intoa single investment, making one point of contact for reporting requirements.
Cons of Equity Crowdfunding Explained
- Increased transparency: Not all entrepreneurs are comfortable posting their financials and business plans online for investors to see. Getting comfortable with equity crowdfunding means you must get comfortable with more transparency.
- "Expensive" fundraising: Why give away a piece of your company if you could receive donations to build your next killer product? It's a strong question and one that entrepreneurs must see an answer to. Giving away a piece of your business' pie is only worth it if you're getting something valuable in return (like the participation of experienced investors in your industry, for example).
Note
Investors may be hesitant to join your equity crowdfunding campaign if your business has been operating for less than a year.
How to Set Up a Successful Crowdfunding Campaign
Crowdfunding sounds easy: Post your funding needs up on a website, offer some small rewards, and you're on your way to a successful fundraising effort. Of course, it's not that easy. Getting hundreds—or thousands—of people to donate to your project requires the same attention, planning, and execution as any successful marketing or fundraising campaign. Here are some tips for launching a crowdfunding campaign on a platform like Kickstarter or Indiegogo:
- Set funding goals:Determine how much money you plan to raise with your fundraising campaign. This is a very strategic decision becausesome platforms function as all-or-nothing fundraising—if you don't hit your fundraising goals, you don't see a single dollar.
- Devise a reward strategy: Giving the right reward can be the difference between hitting your funding goals or missing them. So, devise specific tiers of rewards for smaller donations ($5-$50) and larger ones (more than $50). Try to understand what motivates your donors, then come up with cost-effective rewards that meet their needs.
- Post your campaign to a crowdfunding platform: Prepare your materials, a good video, and your rewards. Then, publish them on the crowdfunding platform of your choice.
- Get social: It's really important not to rely on your platform of choice for bringing in your donors. A 2022 study from the University of Texas at Dallas found that social media promotion is most effective in the first 10 days of your campaign.
- Take in your money and get ready to deliver the rewards: If you hit your target, you'll receive your money. Now, it's time to start the project you've been planning for. Your donors are waiting.
Frequently Asked Questions (FAQs)
What are the disadvantages of using crowdfunding?
Rewards-based crowdfunding's drawbacks include the pressure of delivering on a product that (potentially) thousands of people invested in and the potential that you may not raise any money because you didn't reach your funding goal. Equity-based crowdfunding's main drawback is that you have to surrender equity in your company to get funding.
Who mostly benefits from crowdfunding?
In theory, everyone benefits from crowdfunding when a project goes well. The company gets the money it needs to launch its product or service, and donors get the satisfaction of playing a part in a company going from infancy to success.
