Crowdfunding: how does it work and what are the best crowdfunding sites
If you’re starting a business or ready for big growth, getting the capital you need to scale can be challenging. Banks are often reluctant to offer the loans you need, and it’s rare to find an investor who’ll back a smaller or very new endeavour.
Until recently, business owners had only one option—to fund their growth themselves. That meant going cap-in-hand to family or putting the family home on the line. But crowdfunding offers businesses an alternative.
In many cases, it can be a great option. According to Fundera, even with a global pandemic raging, 2020 saw the launch of 6.4 million crowdfunding campaigns. Then, in 2021 US$4.41 billion was raised via equity-based crowdfunding worldwide.
What is crowdfunding?
Crowdfunding is a way to raise capital on purpose-built platforms from a large group of investors, all making relatively tiny contributions. These are generally ordinary people—not career investors—and can contribute amounts as small as $5 or $10 to the scheme.
Types of crowdfunding
Some crowdfunding campaigns offer something in return for that investment:
In exchange for their contribution, investors can expect a gift, experience or other rewards in return. One example might be, for an investment of $100 towards a new startup, you get tickets to the launch party or priority access to the earliest releases of a new product.
Investors exchange money for a small stake in the growing company. These donations are a type of investment where participants receive shares in the business based on how much money they contribute.
Debt-based donations are essentially peer-to-peer (P2P) lending. The money pledged by backers is considered a loan and must be repaid plus interest by a specific deadline.
Litigation crowdfunding allows a group of individuals or investors to collectively raise money to fund legal action. Backers may provide a donation or receive something in return for the funding.
In some cases, it also allows investors to purchase a stake in a claim they have funded, enabling them to get back more than their investment if the lawsuit succeeds and compensation is received by the litigant.
Donation-based crowdfunding is when people give a campaign, company or person money for nothing in return. The individuals who provide you with cash do it out of support for the growth of your business and nothing else.
What ideas and businesses do well with crowdfunding?
The crowdfunding campaigns that go ‘viral’ are ones that either have an amazing business case, play on the heartstrings or have a share-worthy incentive or idea. For example, the Oculus, a virtual reality headset, was developed using funds from Kickstarter. They wanted $250,000 but eventually raised $2.4 million. The founders sold the company to Facebook in 2014 for $2 billion in 2014.
How does crowdfunding work in Australia?
In Australia, depending on your business idea, and what kind of crowdfunding you choose, you may need to register for licenses and meet other legal terms and conditions. If you’re offering a stake in your company it’s especially important to seek legal advice. And whatever you do, have a chat to an accountant first—you may need to pay tax on the money you receive. Take a look at the ASIC Crowd-sourced funding: Guide for companies for more details.
What are the pros of crowdfunding for business?
Compared to other sources of funding, crowdfunding has a few benefits:
It doubles as marketing
By getting people on board at the crowdfunding stage, you launch or scale with an already engaged customer base.
You get feedback
Most platforms allow for some interaction between you and your investors, which means your customers can give you feedback on your business, brand and product.
You stay in control
With traditional lending or investment, you’ll have to stick to traditional systems, paying interest or handing over parts of your business. Crowdfunding offers more flexibility—you get to decide what you’re happy to give in return for the investment.
It's lower risk
Most platforms only allow you to take the funding if you reach a certain goal. This means you’re not committed to delivering unless you have your full investment. You’re also not risking your own wealth.
What are the cons of crowdfunding for business?
Crowdfunding does have some downsides:
You may not get the funding you need
Most platforms ask you to set a funding goal and a timeframe. If you don’t reach that goal within the time, you get nothing.
It can be resource-intensive
It’s a crowded market, so you may need to invest in slick marketing materials and set aside time to interact with your backers to keep them updated.
You’ll need to be sure you can deliver
Whether you promised lots of rewards, a stake in the company or one of the first products off the ship, you’ll need to be sure you can keep that promise.
What are the best crowdfunding sites for businesses?
If crowdfunding sounds like the right way to go, the next step is to choose the right platform. Each one comes with slightly different functionality, so it’s wise to spend time working out which will suit you. All will take a commission, though when and how much will vary. Here are the most common:
Kickstarter is one of the most recognisable names when it comes to crowdfunding. The company has raised over $6.5 billion since its launch in 2009. Kickstarter has a reward-based funding model, so each individual who contributes to your campaign will receive a gift of personal experience. It's easy to use, and because it's an all-or-nothing platform, you won't be charged fees unless you meet your campaign goal. After that, the fee is 5% plus a payment processing charge per transaction.
Indiegogo is similar to Kickstarter. Since the beginning of crowdfunding, they've been around, and their monthly traffic backs their brand presence. Indiegogo has a staggering 15 million visitors to its website and 19,000 campaigns launched each month. However, unlike Kickstarter's exclusively all-or-nothing model, users on Indiegogo can pick between all-or-nothing and flexible funding. With flexible funding, you will get the funds whether or not the campaign goal is met. Indiegogo's pricing varies depending on the campaign type. Look at their pricing here to see which suits your business needs.
Gofundme has a reputation for raising funds for healthcare, housing in an environmental crisis and more charitable causes, but businesses can also use it. Gofundme has raised $9 billion from over 120 million donations. However, it's important to note that only one in ten campaigns gets fully funded. Nevertheless, a benefit of Gofundme is that there are no platform fees, time limits or deadlines.
Pozible is an Australian owned crowdfunding site with backers from across the world. Over $100 million has been raised on the platform, and more than 15,000 projects have been launched since their start in 2010. Pozible can help you find backers for your project, mission or cause through four different backing models— rewards, donations, waitlists and subscriptions. Donation and waitlist campaigns have no platform fees, and all-or-nothing campaigns have a 5% fee. All contributions have transaction fees per pledge.
VentureCrowd is a premium crowdfunding tool based in Sydney. They specialise in equity, property and debt-based funding. This means that rather than investors receiving a product or making a donation, investors receive equity or ownership in the company raising capital or the property development. VentureCrowd only allows experienced investors to back their campaigns. Investors must have a gross income of at least $250,000 per annum over the last two financial years or have net assets of more than $2.5 million.
How to plan a crowdfunding campaign
A successful crowdfunding push should have all the same elements as a marketing campaign—good strategy, storytelling, incentive, reach and audience engagement.
Create a strategy
Planning your strategy is a vital part of your crowdfunding. First, think about your project, why investors should fund your project, and what will your investors get in return if your campaign is successful. Will you be exchanging rewards, incentives or equity in return for them funding your idea?
Next up, set your goals so that your donors know what they can expect and see that you have thought this project through. Things to consider here are how much funding you need, the timeframe for financing, and how long it will take until your investors see a return or reward.
Document your story
Documenting your story helps potential investors buy into your brand and idea. So sit down and think through your elevator pitch to your investors—state the problem, aggravate it, tease a solution and demonstrate your value. It's worth creating marketing materials that work within this idea, like copy, video and design, to frame your pitch in the best way.
Choose your crowdfunding site
To pick which crowdfunding site is best for your business, you will need to do some research. The top things to consider are:
- The types of business they offer
- Their audience and how many people they reach
- What requirements do they have?
- The fees
- How they help promote your idea
Once you have picked the one that suits your needs, you can put your strategy and story into action and set up your campaign.
Kick off your marketing plan
Your campaign is live. Congratulations! You'll need to get the word out. Engage your social networks, spend on advertising with platforms such as Meta and Google and investigate PR opportunities. This is where your documented story will help you showcase your business and its unique selling point.
Engage with your backers
Make time to connect with your backers through the entire process. This builds trust and helps your message reach further. You'll also often get helpful feedback that could help strengthen your business idea, product or launch marketing strategy.
Need funding for your business? Ask a crowd
Banks and traditional investors might not be a good option for your business, but if you know your idea is a great one or your business is ready to take off, it might be time to try crowdfunding. Before you get started decide on your strategy and investor incentive, create your story, reach out to your audience and, once you launch, keep in close contact with your backers.
Be sure and give your lawyer and accountant a heads-up too, in case there are any legal or tax requirements involved. Once you get the green light, go for it!