What is crowdfunding?
There are many different ways to raise investment for early-stage businesses and start-ups, but crowdfunding is one of the most exciting. With research from Crowdsourcing.org and the World Bank indicating that crowdsourcing for business could be worth as much as $300 billion (USD) by 2025, its worth considering whether crowdfunding  as an alternative to traditional forms of debt and equity financing  could be the right move for your business. Explore crowdfunding websites in a little more depth with our simple guide. Understanding crowdfunding for business  Crowdfunding refers to the practice of funding your business venture through a variety of people, rather than a traditional investment firm or angel investor. Using a crowdfunding website (like GoFundMe or Kickstarter), youll settle on a target figure before asking people to invest a small amount. There are plenty of examples of companies that successfully used a crowdfunding website to secure investment. One of the most famous is Oculus. Purchased by Facebook for $2 billion (USD) in 2014, Oculus originally launched on Kickstarter, seeking an initial amount of $250,000 (USD). Types of crowdfunding  Its important to understand that there are several different types of crowdfunding campaigns, each of which is likely to have a slightly different impact on your company:  Debt crowdfunding  Like traditional business loans, money raised through debt crowdfunding (at a set interest rate) needs to be repaid. Equity crowdfunding  Like private equity investment, equity crowdfunding refers to cases where youll provide investors with equity in your business in exchange for capital. There are a couple of benefits associated with equity crowdfunding; namely, you set the terms regarding how much equity you give up. Plus, unlike debt crowdfunding, you dont have to repay the capital youve raised via crowdfunding. Reward crowdfunding  Providing a slightly different crowdfunding model, reward crowdfunding is a system wherein you offer rewards to backers in return for investment. These rewards are usually linked to your product, i.e., early access to the service, special bundles, etc. Donor crowdfunding  Finally, theres donor crowdfunding. With this type of crowdfunding, you arent required to repay the funds or provide rewards, so you can invest the capital back into your business. The type of crowdfunding model that is likely to work best for your firm depends on a range of factors, as well as the level of ownership that youre prepared to concede. Crowdfunding for business is relatively straightforward. Essentially, youll first need to register with a crowdfunding website (some of the best options for small companies include Indiegogo, Seedrs, and Crowdcube) before explaining who you are and what youre trying to achieve. Then, you need to promote the campaign and attempt to hit your target. Its important to remember that some crowdfunding websites are all or nothing  meaning that if you dont raise the full amount, you wont receive any money. If the campaign closes and youve reached your target, the site will take a cut, and youll receive your funds. Crowdfunding advantages and disadvantages for small businesses  There are many advantages associated with crowdfunding for business. Firstly, its a quick and simple way to get financed, with no up-front fees or drawn-out pitch process. Its also important to note that crowdfunding provides your business with a great origins story, which can help drum up positive media coverage and PR for your firm. With some types of crowdfunding, theres the additional benefit of not having to give up ownership of your firm. However, you should bear in mind that donation-based and debt-based crowdfunding tends to be less positively received for small businesses. But its not all plain sailing, and when it comes to crowdfunding advantages and disadvantages, there are a few sticking points. Most importantly, crowdfunding requires an enormous amount of effort, time, money, and luck to do successfully. Plus, the amount of investment capital you can expect to obtain via a crowdfunding website is usually less than would be available with a traditional investment firm. Also, its important to remember that while successful crowdfunding campaigns can generate positive PR, unsuccessful campaigns can lead to negative coverage, which could damage your brand reputation. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.