Business Funding | Crowdfunding

What Is Crowdfunding and How Does It Benefit Business?

By | December 8, 2020
entrepreneur co-working space accelerator researches what is crowdfunding for a future campaign

Crowdfunding was initially used as a way for artists to fund their projects and engage their audience, even when that audience was relatively small. 

Kevin Kelly, author and founding editor of Wired, had the concept for crowdfunding in his essay 1,000 True Fans. Originally written in 2008, he advocated for people to focus on building relationships as a means of building business.

Today, millions of people use crowdfunding platforms to finance their projects, products, and businesses. If you’ve backed a project or creator yourself, explored the possibilities of raising money through crowdfunding, or have never even heard of crowdfunding, this article is for you.

What Is Crowdfunding?

Crowdfunding is the process of raising incremental amounts of money from a large number of sources to achieve financing. There are multiple crowdfunding strategies, much like there are multiple strategies in traditional business financing, including debt, equity, and more.

A crowdfunded project, creator, or business is supported by its target audience or early believers, often before or during the production, creation, or manufacturing processes. Crowdfunding can be used to fund an idea or the continued creation of content. 

Let’s get into how these different uses of crowdfunding have led to the various types of crowdfunding platforms. 

Types of Crowdfunding

Since crowdfunding has become a popular way for people to raise money for their entrepreneurial passions, a variety of crowdfunding strategies has emerged.

types of crowdfunding from rewards, debt, equity and donation-based

1. Rewards-Based Crowdfunding

Likely the most recognizable form of crowdfunding is rewards-based. This happens when those who support a project or campaign receive something in return, whether it’s recognition, products, services, or more, such as a custom mixtape.

Probably the most famous crowdfunding campaign in history was for the Pebble smartwatch, which raised over $20 million from more than 78,000 backers. Pebble offered multiple reward options for backers to choose from, including a $5,000 option to receive 10 watches in each color, or 30 watches in total.

Popular rewards-based crowdfunding platforms include:

2. Donation-Based Crowdfunding 

Much like a non-profit depends on donations from their philanthropic supporters, donation-based crowdfunding has become extremely popular among creators of content and services. 

You could use Wikipedia as an example of a company that successfully leverages donations from its audience to fund ongoing operations. Another example is when your favorite blogger has a “buy me coffee” button enabled at the bottom of their article. 

donation-based crowdfunding example from Wikipedia

Popular donation-based crowdfunding platforms include: 

3. Debt Crowdfunding

Sometimes your supporters aren’t willing to simply give you no-strings-attached money, but are willing to provide you with a loan to be paid back with interest. This is known as debt-based crowdfunding, peer-to-peer lending, or even mini-bonds. 

An example of a company that successfully leveraged debt crowdfunding is Pocket, a UK-based land developer that issued a mini-bond, raising 2.5 million pounds at a 10% coupon with a four-year maturity. 

Popular debt-based crowdfunding platforms include:

4. Equity Crowdfunding

Another option that businesses find advantageous is equity crowdfunding, or the sale of shares to a group of private investors raising equity financing. This allows the company to raise adequate funding without being tied to terms of a loan or any promises to deliver. 

Instead, equity crowdfunding allows the business to fund their growth goals without having to worry about profitability. Equity crowdfunding also strengthens brand equity by offering the business’s biggest supporters the opportunity to become part-owners and only further their word-of-mouth marketing. 

Tossed, a salad bar chain, successfully raised more than $1.6 million in an equity crowdfunding campaign, or more than 165% of their goal. 

Popular equity crowdfunding platforms include:

What Is a Crowdfunding Campaign? 

A crowdfunding campaign is the actual fundraising process which is usually time constrained with a deadline in some campaigns the funding goal must be met. 

For example, the hypothetical crowdfunding campaign for your business launches tomorrow and will remain open for investors to participate for the next 30 days, after which the campaign will end and no longer accept investments. 

Depending on the crowdfunding platform, the funding goal may need to be 100% achieved by the campaign’s expiration date or else all of the money will be refunded to investors. 

Crowdfunding Examples and Success Stories

Below are some of the most successful crowdfunding campaigns of all time. 

1. Snapmaker 3D printer | Rewards-Based Crowdfunding

In 2017, Snapmaker successfully raised $2,277,182 from 5,050 backers on Kickstarter. In 2020, they went on to raise an additional $7,850,866 from 7,388 people. The latter crowdfunding campaign is the most successful project in the technology category on Kickstarter to date.

2. Chapo Trap House | Donation-Based Crowdfunding

This political podcast has been around since 2016 and has amassed over 35,000 Patreon supporters, netting their team an estimated $158,149 every month. This makes them the second most popular creator in the Patreon community.

3. Camden Town Brewery | Equity Crowdfunding

Incorporated in April 2015, Camden Town Brewery raised more than $3.5 million in exchange for 5.37% equity in July 2015. By December of that same year, AB Inbev (Anheuser Busch) acquired the company in a deal estimated to be more than $110 million.    

Crowdfunding Your Company, Content, or Craft

The crowdfunding landscape has evolved significantly over the past few years and will likely continue to grow and change. Whether you are a first-time founder or experienced craftsman, you can consider crowdfunding as a way to finance your passion project. 

If you’re seeking funding for a growing business, consider EquityNet as the best place to refine your strategy, optimize your plan, connect with a crowd of talented investors and raise capital for your company.

Continue on to chapter two where we discuss the benefits of crowdfunding compared to the disadvantages. 

guide to crowdfunding

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