Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together, with the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives and the so called venture capitalist
A venture capitalist is a private equity investor that provides capital to companies exhibiting high growth potential in exchange for an equity stake.
How Crowdfunding Works?
Crowdfunding has created the opportunity for entrepreneurs to raise hundreds of thousands or millions of dollars from anyone with money to invest.
Crowdfunding provides a forum to anyone with an idea to pitch it in front of waiting investors.
In general, there are three main crowdfunding types:
- DONATIONS BASED
- REWARDS BASED
The first category is typically reserved for nonprofits and humanitarian efforts. Reward-based crowdfunding works best if the total amount being raised is less than $50,000. Finally, equity crowdfunding is usually offered only to accredited investors, who may receive stock or convertible debt instruments in return.
As an alternative method of raising capital, crowdfunding turns the traditional method of business funding upside down.
Instead of shopping a business plan to several different banks and financial institutions, crowdfunding platforms let an entrepreneur showcase his or her idea and provide investors of all sizes an opportunity to participate in growing the business. The arrangement could be as complex as equity agreements for major investors to pre-market product samples for smaller contributors.
🔑 KEY TAKEAWAYS
• Restrictions apply to who is allowed to fund a new business and how much they are allowed to contribute.
• Crowdfunding allows investors to select from hundreds of projects and invest as little as $10.
• Crowdfunding sites generate revenue from a percentage of the funds raised.
If you’re looking at crowdfunding a business idea or nonprofit charity, here are the major platforms in the market.
Kickstarter is the most well-known name in crowdfunding and arguably the most active platform, raising over $2 billion since its launch in 2009. On a typical day, the Kickstarter community pledges over $1.5 million. The platform does not accept charity or humanitarian projects or other personal use projects that other platforms allow. It’s also an all-or-nothing deal; if a project doesn’t reach its goal, no money will be collected, so there’s a bit of a risk involved. Kickstarter also keeps 5% of every successful project.
Indiegogo was the first major crowdfunding platform, and it has raised over $1 billion since its inception in 2007. In 2015, the platform funded over 175,000 campaigns with contributions from 2.5 million people across 226 countries.
Indiegogo has no prohibitions against cause-related and humanitarian projects, and it also offers a “flexible funding” option that allows you to collect all your donations even if you don’t reach your goal. The company keeps 5% of all money raised, whether you hit your goal or not. There’s also an additional fee of 3% plus $0.30 per transaction on any contributions made by credit card. There’s also an equity investment option offered in partnership with MicroVentures.
CircleUp, located in San Francisco, is an equity-based crowdfunding company designed to help emerging brands raise capital and grow their business. Since its launch in 2011, CircleUp has helped 211 entrepreneurs raise $305 million. The average raise is less than $1 million, and the average investment is $100,000. Most campaigns take between two and three months to close.