What Is Crowdfunding in Business?

Crowdfunding could be the answer when you need business capital or funds for a nonprofit. Learn more about what it is right here.

Image of crowdfunding platform on a laptop
November 8, 2022
Kathleen Crampton
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Reading time about 5 min

From the half-baked potato salad campaign that showed us netizens could take a joke to the wildly successful VR gaming headset that got its start on Kickstarter (that led to a $2 billion Meta acquisition), it’s safe to say crowdfunding works. It’s an innovative way for individuals to come together and make a significant impact. If you’re starting a business and are interested in crowdfunding, meaning you have a pulse, keep reading. We hope to inspire you with some fundraising ideas we’ve seen across the best crowdfunding platforms.

The Basics:

  • Crowdfunding occurs when a group of people, usually assembled through the internet, funds a business venture.
  • The five main types of crowdfunding are rewards, donations, debt, equity, and real estate.
  • Kickstarter, GoFundMe, and Indiegogo are some of the most popular crowdfunding sites today.
  • As an alternative funding style, crowdfunding has multiple pros and cons for small businesses seeking capital.

What Is Crowdfunding?

Crowdfunding is a way to fund a project or business venture by gathering the power of the masses. Traditional business ventures rely on financing from a few set investors or organizations, who usually skew toward the wealthy. Alternatively, crowdfunding disrupts this traditional funding structure by democratizing it.

Many people may contribute as little as a few dollars or as much as millions. This fundraising style primarily relies on the power of social capital, as those seeking funding access networks through social media platforms and crowdfunding sites.

What Are the Different Types of Crowdfunding?

There are five main types of crowdfunding. These are:

Rewards: Rewards-based crowdfunding involves donations in exchange for a product or service. The business owner asks people to exchange their money for the promise of future rewards.

  • Example: The Fidget Cube raised nearly $6.5 million on Kickstarter by promising people who donate a minimum amount their Fidget Cube.

Donation: Donation-based crowdfunding is when people request donations with no strings attached (except ideological ones). Those hoping to generate funds using donation-based crowdfunding must demonstrate a meaningful reason (or interesting) that the crowd should part with their precious coin. This crowdfunding type is more for prosocial charitable giving, so it’s not often used by small businesses — although it’s occasionally used for film productions and other creative projects.

  • Example: The film “The Babadook” used donation-based crowdfunding to next-level its special effects and doubled down on its creeping sense of horror.

Debt: Debt-based crowdfunding, also known as peer-to-peer lending, is when someone takes donations from a crowd with the promise and expectation to pay them back later. It’s like borrowing money from a bank, but with varying (and sometimes no) interest and multiple lenders.

  • Example: Startups commonly use this crowdfunding type, and early-stage founders prefer taking loans from various investors to dealing with traditional lending establishments.

Equity: Equity-based crowdfunding allows business owners to raise capital by exchanging equity ownership in the business for money from investors.

  • Example: LuftCar, an air and road mobility vehicle company, is seeking funding from investors in exchange for equity in what they believe will become a $1 trillion market by 2035.

Real Estate: Real estate crowdfunding allows individuals to invest while supporting developers and others in the real estate development biz.

  • Example: The Tower Place Apartments in Philadelphia, Pennsylvania, takes minimum investments of $10,000 from individuals who want to break into the real estate investment game without breaking the bank.

What Are the Best Crowdfunding Sites?

Kickstarter, GoFundMe, and Indiegogo logos

There are nearly 1,500 crowdfunding platforms that exist today. Of these, some of the top options include:

Kickstarter: Besides having the name synonymous with crowdfunding, Kickstarter has a lot going for it. From its Google Analytics integration to multiple tracking tools, the platform’s higher percentage balances by top features and perks.

GoFundMe: GoFundMe is renowned for its versatility, no-cost platform fee, and focus on the narrative behind the fundraising need.

Indiegogo: This site allows business owners to start a two-month campaign that integrates with multiple social media platforms, including Meta and Twitter.

Learn more about the best crowdfunding platforms.

What Are the Pros & Cons of Crowdfunding for Small Business?

Crowdfunding isn’t perfect. As with any fundraising, it comes with advantages and disadvantages.

Pros:

  • It’s low risk. You usually don’t need to repay money earned through a crowdfunding campaign.
  • Your business venture gets seen by many eyes, meaning traction and potential customers once you get up and rolling.
  • You get free feedback from a wide array of people.
  • There’s lots of flexibility in what you want to offer in exchange for investments.

Cons:

  • Crowdfunding can see low success rates, especially if you don’t have a vast social network or an idea that quickly goes viral.
  • Having your business venture seen by many eyes means that someone might steal your idea (as did the founder of the Stress Cube when the Fidget Cube production schedule was delayed).
  • You may experience constant feedback from people who aren’t intimately familiar with your product or service might lead you astray.
  • If you don’t successfully return on individual investments and fulfill promises in your campaign, you risk tarnishing your reputation in the small business community.

Best Crowdfunding Practices

  1. Do your research: Verse yourself in every relevant element that will impact your campaign. These include what similar business ventures did to crowdfund successfully; what type of crowdfunding makes the most sense for you and your business; what kind of social network you and your business partners have, and how you can build it further; and any alternative fundraising ideas that might be better than crowdfunding or that you can use to augment your crowdfunding capital.
  2. Create a narrative: Yes, Allbirds wool shoes could probably stand on their own two feet — but it was their story about creating an unbranded eco-friendly shoe made of wool that doesn't require socks, are washable, and stay odor-free that sold the project. That later turned into selling the product: the company had revenue of $277.5 million in 2021.
  3. Lay it all out: People want to know exactly where their money goes. Be as specific as possible regarding the venture and your plan of action to achieve your business goals.
  4. It’s all about the hype: You need a lot of people to bear witness to the awesomeness of your business to have a successful campaign. You must immediately get the word out to members of your community and shamelessly self-promote across social media platforms.
  5. Give the people what they want: Even if you can’t offer a one-to-one reward in terms of donation to a product or service, try offering other incentives to entice your potential investors. Even something as little as a shirt bearing your company name can make the difference between someone choosing to donate or taking their money elsewhere.

Now that you’ve learned what crowdfunding is and the power it can wield, it’s time to decide if it’s right for you. If you do start a campaign, we can help you promote it. Campaign success relies on your scope and reach. With 98% open rates, SMS marketing is a smart and efficient way to scale any small business fundraising strategy. We’d love to help turn your campaign into a successful start-up fund that gets your business off and running.

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