5 Most Popular Types of Crowdfunding for Startups

University Lab Partners / 5 Most Popular Types of Crowdfunding for Startups

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Over the past decade, crowdfunding has become increasingly prevalent as a source of funding among entrepreneurs and startups that are looking to grow. When you obtain funding from angel investors or venture capital firms, these are considered to be forms of traditional funding that come from a single source or a few smaller sources. When it comes to crowdfunding, small sums of money are gathered from a large group of individuals. While this is mainly used as an alternative source of funding, it’s possible to obtain a significant amount of money with this method.

There are many crowdfunding websites that your startup can access if you want to explore this route of funding. These platforms allow fundraisers to interact directly with the crowd in an attempt to raise funds. While there are many different types of crowdfunding that your startup can use, this source of funding typically requires the startup to make a pitch to the individuals who could donate to the campaign. When you’re attempting to develop a new product, your pitch is essential if you want to meet your campaign goal.

Keep in mind that the crowdfunding website you join will take a small percentage of the money you receive as long as your campaign is successful. In return for the funds that individuals provide to you, it’s possible that you will need to offer a small amount of equity or even rewards that correlate with the amount of funding provided.

The various types of crowdfunding that your startup can take advantage of include:

How Does Crowdfunding Work?

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Crowdfunding is one method that a business can use to raise funds. This particular form of funding allows the fundraisers to obtain money from many individuals via online platforms. Most platforms will only take a fee from the collected funds if you obtain enough funds to meet your fundraising goal.

Crowdfunding is a fantastic option for startups that are looking to grow and require additional funds for the advancement of new businesses, ideas, or projects.

Cons of Crowdfunding

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There are a variety of pros and cons that come with raising money through a crowdfunding platform. For instance, the main issue that comes with crowdfunding on most platforms is that you won’t be able to receive the funds that you’ve raised unless you pass your target goal. If you need the funds to develop a new project and set your fundraising goal to $100,000, you likely wouldn’t receive any of the funds unless you passed $100,000 in contributions.

It can also be difficult to garner interest in your fundraising goal even if you’re on a very popular crowdfunding platform. If you want to raise money through crowdfunding, you will need to create an effective marketing campaign with ads, professional video, and other marketing methods. Keep in mind that you will likely need to do a lot to prepare for crowdfunding before you launch the campaign. Along with running ads, it’s important that you compile emails and do what you can to increase visibility of your product before the launch occurs.

Pros of Crowdfunding

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While there are negative aspects of crowdfunding for your startup, there are also many positives that come with this option, the most notable of which is that there are a wide variety of different types of crowdfunding, which extend from donation-based crowdfunding to rewards-based crowdfunding. You should be able to find a crowdfunding type that matches the fundraising needs of your business. If you use the right type of crowdfunding, it’s possible to raise money without giving up equity in your company.

If your company has yet to obtain financing from angel investors or venture capital firms, crowdfunding is a great way to create momentum for your startup and brand. Having a successful crowdfunding campaign should make it easier for you to gain additional funding down the line.

Another notable benefit of using crowdfunding to raise money is that it should help you grow your market. The individuals who contribute money to your crowdfunding campaign are usually looking to be early adopters of the idea or product that you want to develop. Once you have used the funds for their intended purpose, these individuals should act as a built-in market. Keep in mind that successful crowdfunding campaigns raise an average of $7,000, which is a substantial amount of capital.

Why Use Crowdfunding?

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There are a myriad of reasons why your startup should consider using crowdfunding, the primary of which is that it allows you to enhance interest in your brand while also raising necessary capital for a new product idea or business idea that you might have. If you don’t yet believe that your startup is well positioned to obtain angel investments or venture capital funding, crowdfunding gives you the opportunity to raise high amounts of capital without needing to provide investors with equity in your business.

If you want your company to grow, crowdfunding is a fantastic funding method to consider.

1. Donation-Based Crowdfunding

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Donation-based crowdfunding is a type of crowdfunding that involves amassing high amounts of donations without needing to provide the investors with anything in return. This particular form of crowdfunding is commonly used for charities and social causes.

When you’re looking to set one of these campaigns up, they usually last for around 1-3 months before funding closes. The majority of donation-based crowdfunding campaigns seek around $10,000 or less in contributions, which is necessary since you won’t be providing anything in return.

2. Rewards-Based Crowdfunding

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Rewards-based crowdfunding is easily the most popular form of crowdfunding that’s available to startups. While this form of crowdfunding is similar to donation-based crowdfunding, the main difference is that you will provide investors with different tiers of rewards that directly correspond with the various pledge amounts.

If an individual pledges $50, you could provide them with a copy of the product once it releases. If someone pledges $5,000 or more, they could be provided with a title of co-developer of the product as well as some additional rewards. Most rewards-based crowdfunding campaigns will have at least three reward levels for investors to select from. These campaigns are almost always used for actual products that require funding to fully develop. A rewards-based crowdfunding campaign usually runs for anywhere from 1-3 months and typically calls for less than $100,000 in contributions.

3. Equity-Based Crowdfunding

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Equity-based crowdfunding is an increasingly popular type of crowdfunding. In fact, this form of crowdfunding was made possible with the signing of the Jumpstart Our Business Startups Act in 2012, which eased some of the securities regulations in the country and helped to encourage startups to seek different types of funding. This is the only type of crowdfunding that requires the startup to provide investors with shares in their company.

When you use equity-based crowdfunding, you will have the ability to set minimum pledge amounts and investor caps, which gives you some level of control over how much equity you provide. While investors can make requests to view some of your business documents, you will be able to accept or deny these requests. These campaigns will usually last for around 2-4 months. Since you will be providing equity in exchange for capital, it’s possible to seek anywhere from $50,000 to well over $100,000 in funding.

4. Debt-Based Crowdfunding

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Debt-based crowdfunding is a crowdfunding option that allows you to obtain high amounts of funding without needing to give away any equity in your business. In many cases, these campaigns will seek hundreds of thousands of dollars, which is why they are typically used to assist companies in acquiring smaller businesses or to finance a merger deal. This particular type of crowdfunding is similar to taking out a loan. In exchange for their money, investors usually require a binding agreement to repay the amount that they give you within a certain period of time.

While it’s possible that interest won’t be attached to the funding, there are also times when a small interest rate will be allotted, which you should be aware of before you consider debt-based crowdfunding. This crowdfunding is more beneficial when compared to a standard loan because the interest rates are much smaller. The use of online platforms to facilitate the exchange also helps to get rid of the waiting time that comes with loan approval. You likely won’t be required to pay back the funds until your company starts to generate revenue. A debt-based crowdfunding campaign typically lasts for 4-5 weeks.

5. Royalty-Based Crowdfunding

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Royalty-based crowdfunding is a form of crowdfunding that provides backers with a smaller percentage of the revenue that’s gained once the venture or project becomes successful enough to generate revenue. For instance, a company that’s working on developing an app for smartphones might require some funding to help them complete development. Once the app has been placed online, any backers of the campaign would be provided with a certain percentage of the revenues that are gained from the app in question.

The primary difference between shareholders and participants of royalty-based crowdfunding is that backers only obtain royalties based on sales that are made from the product or idea that they invested in. If you want to run one of these campaigns, it’s possible to ask for anywhere from $5,000-$250,000 depending on what the campaign is being used for. These campaigns are typically left open for 30-60 days.

Get Started with Crowdfunding For Your Startup

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The first step towards getting started with crowdfunding for your business is to find a crowdfunding website or platform that caters specifically to startups like yours. While Kickstarter is the primary crowdfunding platform available to startups, there are more than 600 platforms across the world that you could consider. Each platform has its own distinct advantages that you should be aware of before joining.

  • For instance, iFundWomen is a crowdfunding platform that’s geared towards women-led startups. They also reinvest a portion of the fees that they obtain back into businesses.
  • Platforms like Fundable come with a flat monthly fee and offer extensive campaign consulting services that could be useful.

Create an Effective Campaign

If you want to obtain crowdfunding for your business, it’s essential that you’re prepared for the campaign. If you properly understand your audience and the product or idea that you’re crowdfunding for, you should be able to create an effective campaign. Keep in mind that extensive market is very important before you start crowdfunding. The product or idea that you’re raising money for should be somewhat known when the campaign begins. Go to this link to learn more about what it takes to prepare for a crowdfunding campaign.

The platform that you choose should also have some tips and resources that can help you make the most out of this process. Here at University Lab Partners, we can provide you with the office or lab space that you need to develop the product that you’re receiving crowdfunding for.

Whether you require a small lab bench or private space, the wet-lab incubator at University Lab Partners should be able to accommodate all of your needs as you attempt to grow your business.

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