Crowdfunding sites for startups are crucial in the development of an early-stage business. The entrepreneurs of startups can raise the capital funds required for their business by collecting small contributions from a large number of people. This process can be done through the internet on online platforms, which are popularly known as crowdfunding sites for startups or growing businesses. The startups use the method of crowdfunding as a way to access alternative sources of funds. This article elaborates on the basic concepts of crowdfunding, various types of crowdfunding, major online platforms in the industry, and many more.

 

 

Cue Points

• Crowdfunding sites for startups are online platforms that allow early-stage businesses or entrepreneurs to raise their capital funds. Basically, crowdfunding is the process of raising funds or money required for a business venture by collecting small amounts of capital from a large number of people. The crowdfunding platforms provide an online medium or channel for facilitating this process of crowdfunding.
• Capital fundraising is the key process for the growth of a new venture. Often larger and established companies find it easy to acquire these investment funds from traditional sources or any other related financial institutions. However, some early-stage businesses and small to medium companies will find it significantly difficult to secure essential capital funds required for the growth of the business. The process of crowdfunding is better valued and used by these companies. 
• Crowdfunding has its own benefits and flexibility that attracts most of the startups. It serves various types of funding requirements and different financial models that suit diverse categories of startups. Different from traditional forms of fundraising methods that solely depend on the circle of wealthy owners, banks, venture capitalists, financing firms, or relatives, the method of crowdfunding allows the entrepreneur to raise capital from a variety of sources. 
• The contributions for startups can be as low as $10 to larger amounts of money. Even though several online platforms usually keep certain rules, regulations, terms, and conditions on who can fund the new ventures and how much money can be invested in them. Crowdfunding sites for startups generate a significant amount of revenue from a percentage of the capital funds they raise for startup ventures. Some of the most popular crowdfunding platforms are Kickstarter, GoFundMe, Indiegogo, Crowdcube, Fundable, and many more. 
• Some of the crowdfunding projects by startups offer rewards related to their business to the investors who will fund their company. These rewards can vary from participating in a new service or product launch ceremony to receiving gifts of various kinds. This custom reward system will create a healthy relationship between the startup business and its investors. 

 

Types Of Crowdfunding Sites And Key Players In Each Category

There are different types of crowdfunding platforms are available that are essential for funding and supporting growing businesses. Some of the basic types of crowdfunding sites that are suitable for startups are listed below. Choosing the correct crowdfunding site from the below list, that is suitable for your business depends on your startup’s requirements, the type of funding that you are anticipating, and the level of engagement of backers that you require. 

• Equity-Based Crowdfunding Sites

In this type of crowdfunding site, the investors offer capital funds in exchange for shares or equities in the company. It will provide the investors with a potential amount of returns for their investment in case the company becomes successful. This type of crowdfunding site is mostly used by startups, small businesses, and early-stage businesses. Major players in this type of crowdfunding are SeedInvest, Crowdcube, and Wefunder.

• Reward-Based Crowdfunding Sites

Here the backer or investor contributes their capital funds in exchange for any sort of incentives or rewards that will vary from a nice thank you note to a pre-ordered service or product. It is therefore used by companies that are having creative projects, community initiatives, or product launches. Some of the platforms in this category are Kickstarter and Indiegogo.

• Donation-Based Crowdfunding Sites

This category of crowdfunding deals with investors who give money to support the cause of the project without any financial return or reward expectation. It is most commonly used for charity campaigns, community projects, disaster relief, or medical expenses. GoFundMe and JustGiving are the major crowdfunding websites of this type.

• Debt-Based Crowdfunding Sites (Peer-to-Peer Lending)

This type of crowdfunding website deals with the traditional system of debt and lending money. Individuals or businesses borrow the required amount of money from multiple lenders and repay this amount with interest over a predetermined time period. It is mostly common among the requirements like small business loans, personal loans, and real estate projects. Some of the major platforms in this category are LendingClub, Prosper, and Funding Circle.

• Royalty-Based Crowdfunding 

These platforms are where the investors offer their capital funds in exchange for a particular percentage of the future profits or revenue from this project or business. It is mostly used by licensing ventures,  entertainment projects, and intellectual property development companies. Royalty Exchange and SongVest are the most popular platforms in this type of crowdfunding.

• Hybrid Crowdfunding Sites

As the name indicates, these platforms combine elements of different crowdfunding types like reward-based and equity-based crowdfunding. It caters to the project’s requirements and investor’s preferences. It is commonly used by startups or projects that benefit from both initial product support and long-term investment support. Major platforms under this category include Crowdcube and Indiegogo.

• Niche Crowdfunding Sites

These types of crowdfunding sites for startups focus on financing inventory for product-based startups. It allows the backer or investors to fund the manufacturing of inventory and earn potential returns from the sales. They specialize in consumer product-related startups. They will also offer both credit financing and equity options. Even though this is a platform for angel investors and venture capitalists, it will also provide equity crowdfunding for startups that require significant amounts of capital investments. AngelList, CircleUp, and Kickfurther are some of the niche crowdfunding websites. 

 

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Crowdfund Campaigning And The Involved Procedure

The crowdfunding process requires careful planning and execution of various strategies. The major steps involved in this particular campaigning process are briefly elaborated in the below section.

• The first step is Preparation and Planning. You must set a clear goal of how much money you want to raise. It is a good practice to understand the specialties of the target audience of investors so that you can customize your campaign to appeal to them. For choosing an appropriate crowdfunding website you can conduct thorough research. It is important to understand each platform’s rules, regulations, terms, and conditions. Create an effective pitch deck with a narrative type of storyline and include some appealing visual representations. If you are looking for a reward-based crowdfunding site, then plan for the incentives or rewards that you will provide the investors.
• Now, you must Set Up The Campaign. Set up your profile on the selected crowdfunding site and set up your campaigning page with information about your business, rewards, and funding goals. Make sure to create an appropriate marketing strategy using a content calendar (for planning and scheduling regular updates and promotional events) and a promotional strategy (press releases, social media marketing, influencers, and email campaigns).
• In this step, you can begin the fundraising campaign. You can initially launch your fundraising campaign to your family, friends, and other close supporters to get sincere feedback and make adjustments accordingly. Now, officially launch your campaign in front of potential investors and make sure to engage them actively through business updates, reply comments, and other channels of communication. 
• The next step involves, Managing The Launched Campaign. This step involves monitoring the progress of your business and maintaining proper communication with the investors. Many platforms also provide analytical tools for monitoring the performance of your campaign. You can adjust the strategies according to the feedback and progress of your launched campaign. Keep the investors informed about the progress of the campaign and its achievements. 

• You need to perform several Post-Campaign Activities. These include the collection of raised funds and ensuring the platform’s rules and regulations are met. Make sure to deliver the promised incentives and rewards to the investors and be transparent about any potential issues or delays in delivering those rather than creating a negative reputation for your company. You can also thank the investors for their funding and feedback. Make continuous communication with the backers about the business updates.

• The last step includes the Evaluation Process of the launched campaign. You can analyze the results acquired from this campaign and document the lessons learned. You can get reviews and feedback from the investors to get a better understanding of the future planning of similar projects. 

 

Benefits And Challenges Of Crowdfunding Sites For Startups

Crowdfunding platforms offer new ventures or startups a vital and unique opportunity for raising capital funds, customer engagement, and market validation. But these process also comes up with its own advantages and disadvantages. The process of crowdfunding requires careful planning, understanding of potential risks and costs involved, and continuous effort. 

 

Benefits

• Capital Fundraising is one of the most vital and major advantages of the crowdfunding process. The crowdfunding sites for startups provide an online platform for raising funds required for running and growing the business. It removes the need for approaching traditional investors or other financial institutions, which might be challenging and time-consuming for the new growing ventures.

• Market Validation is another beneficial factor. When fundraising campaigns end up successful, they can validate the demand for your business’s service or product. You will be able to get sincere feedback from the investors and backers which will enable you to refine and revise your products or services. 

• You can get enough Marketing and Exposure using this technique. These fundraising campaigns through the crowdfunding platforms will generate publicity and attention from the media. It will in turn help in building brand awareness and creating a group of early adopters for your product or service.

• Access to different types of Investors is an add-on benefit. The crowdfunding process involves gathering the required capital fund from a pool of multiple and various investors. It will reduce the risk of dependence on a single investor, financial institution, or a group of joint investors. 

• There can be several Pre-Sales opportunities. Some crowdfunding sites provide rewards or incentives to investors. Such reward-based crowdfunding platforms can be used to pre-sell your services or products and generate initial revenue and customer feedback. It will also provide you an opportunity to analyze the market interest or demand and reduce the potential financial risks by refining and improving the product or service.

• You can also get access to Customer Engagement. The crowdfunding process allows you to be directly involved with potential customers who are also emotionally invested in your growth. There is a chance that the involved investors might become your brand ambassadors and promote your startup business. It will give you enhanced business opportunities and networks in the marketplace.

 

Challenges

• The process of crowdfunding involves planning and proper execution of the fundraising campaigns. It is a time-consuming procedure and it will take considerable effort from your side. To maintain the relationship with investors it is necessary to engage in continuous updates and discussions with them. 

• The crowdfunding sites for startups ask for detailed information about your business idea or project. It poses a potential risk of exposing your unique idea publicly and threatening business idea theft. There are chances for negative publicity, feedback, and harsh scrutiny of your business idea. It might defame your startup’s reputation.

• There is no guarantee that your fundraising campaign will be successful. Sometimes you may not get funds from any of the platforms due to high competition and compelling business pitch requirements. This is a potential challenge faced in the due process of crowdfunding.

• Most crowdfunding sites for startups charge platform fees for providing your platform to raise capital money. It is usually between 5% to 10% of the total funds that the startup raises. The payment of processing fees for the platform and the costs for promised incentives or rewards for the investors can significantly reduce the total fund value you have raised from the crowdfunding campaign.

• The Reward-based crowdfunding sites require certain incentives or rewards to be given to the investors. Some of these might be costly and logistically challenging. There might be reputational damage or trust issues if you fail or delay delivering these rewards.

• Equity-based crowdfunding requires exchanging a particular share of your company for the capital fund provided by the investors. Also managing and engaging a large number of investors might become a difficult and time-consuming task for a startup business. 

• In crowdfunding types where equities or shares are given in exchange for the fund money, several rules, regulations, and compliances are required. It is essential to comply with different regulations that might be costly and complex. Also, this process will have accounting and legal fees for your business. 

 

 

FAQs-

1. How To Choose The Type Of Crowdfunding For Your Business?

Choosing suitable crowdfunding sites for startups is a vital step in the fundraising process. First, you can analyze and determine the nature of your business or project and its requirements. Then establish your financial objectives and needs and choose if you want market validation. Now, you can decide on sharing the ownership and control of your business. Next analyze your ability to fulfill reward-based, equity-based, or debt-based financial obligations. You must properly research the fees and processing charges implied by various platforms. Finally, check on the legal and regulatory considerations of different types of crowdfunding and the terms and conditions of every platform.

 

2. What Are The Alternative To Crowdfunding Platforms?

Some of the major alternatives including traditional fundraising methods are:

• Debt Financing like micro-loans, lines of credit, and bank loans
• Equity Financing like private equity firms, venture capitalists, and angel investors
• Grants
• Strategic Partnerships
• Business incubators and accelerators
• Friends and family
• Self-financing

 

3. Do You Have To Pay Back Crowdfunding Money?

If the crowdfunding type is donation-based then you do not have to pay back money to investors. But if the crowdfunding is equity-based, reward-based, or debt-based then you will have to pay the money, equities, or rewards accordingly. 

4. Can I Run Multiple Crowdfunding Campaigns And How Much Money Is Required To Launch A Campaign?

Yes, you can run multiple campaigns either simultaneously on the same crowdfunding site or different platforms consecutively. However, managing this multiple fundraising campaign can be challenging if not planning carefully. 

The costs for launching a crowdfunding campaign vary depending on different factors. The major factors are platform fees, incentives for investors, payment processing fees, rewards production costs, shipping fees, and other related marketing expenses.

5. What Are The Legal Obligations And Tax Requirements For Crowdfunding?

• The legal requirements for the process of crowdfunding vary from country to country and the type of crowdfunding conducted. Mostly equity-based crowdfunding has high regulation and legal obligations. It is suitable to consult a legal professional to ensure compliance with rules and regulations related to the type of crowdfunding site you choose. 
• The funds raised from the crowdfunding sites are considered taxable income and are liable for taxation. Also, taxation obligations will depend on the type of crowdfunding and the local laws of the country. You can consult a tax professional to get advanced guidance on this matter. 

Conclusion

Crowdfunding sites for startups are powerful fundraising tools for an early-stage growing venture. It not only provides them required capital money but also offers them market validation, customer engagement, business networking, and brand recognition. Major crowdfunding platforms in the industry are Indiegogo, Patreon, Wefunder, Crowdcube, Crowdfunder, Kickstarter, GoFundMe, StartEngine, Fundable, IFundWomen, LendingClub, EquityNet, SeedInvest, Republic, MicroVentures, and many more. Choose the right platform depending on your funding and business requirements. With proper planning and strategic use of these platforms, you can leverage the benefits of the crowdfunding sites for startups.