Crowdfunding: Does My Startup Need It?
Crowdfunding is the revolutionary tool that connects entrepreneurs with a vast pool of non-traditional small-dollar investors, and then makes use of their social media networks. In the past startups could only seek funding from relatives, banks, and venture capitalists, or sometimes through winning a small grant. Now with crowdfunding websites, creatives can maintain control of their vision and easily receive funding through donation, which doesn’t need to be paid back as long as goals are met.
The most common Crowdfunding sites are Kickstarter, GoFundMe, and Indiegogo, who allow investors access to thousands of projects and they can give as little as $10. Patreon lets patrons subscribe for monthly contributions as low as $1. Campaigners often offer incentives and rewards to backers like first edition products before they’re released, or gifts made especially for sponsors. Some ventures even offer equity depending on the type of business. Crowdfunding allows anyone to support a product or project they want to succeed and links early-stage makers with capital they very much need.
Because anyone can invest, no matter how experienced or knowledgeable they are about investing, the SEC regulates equity-based crowdfunding in the US, and restrictions are in place for how much anyone can contribute to any new business. As startups can be such a risky investment and this provides protection for new investors who may not be able to afford a great loss.
Almost any project can start a crowdfunding campaign from the most innovative in tech, gaming, and the virtual world, to artists, writers, musicians, and any kind of crafter. Crowdfunding is also most commonly used for those who have suffered some tragedy or unexpected loss due to, for example, a natural disaster or expensive medical bills and treatments. When friends, family, or new sponsors donate to a cause or support someone’s work, they tend to share the info on their social media pages, which allows for exponential exposure many times over.
The crowdfunding sites operate by taking a percentage of funds raised. Campaigners can generate far more than the amount they pitch but on some platforms, like Kickstarter, the target must be met in order to collect any funds. Indiegogo allows backers to choose a fixed or flexible model. Campaigns can receive funds pro-rata, or wait until they’ve reached their goal. Flexible funding is typically most beneficial to the startup as they have the funds as they are given, but is less secure for the investor who could lose everything if the company fails.
The main downsides to crowdfunding are that you may not get any funding at the end of the campaign and possibly pay platform fees if the goal is not met, depending on the site. Depending on your type of venture, some could claim you “resorted,” to crowdfunding, which could be less socially acceptable for an established business than for an early-stage startup. Each crowdfunding platform will have its own rules and fees that must be abided, along with SEC and local jurisdictions. If pursued diligently, the potential benefits to getting crowdfunded far outweigh the possible negatives.
Crowdfunding exposes you to investors you would never have access to otherwise, as well as qualify for funds that were just unreachable before this type of framework. Grassroots fundraising that comes with built-in marketing and the constant gauge of customer opinion is possibly the most efficient way to rocket a business to the next level, while maintaining its integrity as an independent. It also adds the notion of philanthropy and altruism to an almost entirely cutthroat world, giving more control to the masses over what types of products and services we want to see produced. In a way, it lets us “be the change we want to see in the world,” even in the often unfriendly realms of capitalism. But for the small-scale entrepreneur, crowdfunding can be the elusive bridge between massive success and making it at all.
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