Crowdfunding is a form of raising capital. You need to have people that know about you (your crowd) in order to have a successful crowdfunding campaign. People don’t go on different crowdfunding platforms and shop through them.
The best type of crowdfunding for startups would be equity and rewards-based. Nonprofit organizations usually use donor-based. The best option for SMEs (small to medium enterprise) would be debt-based, with rewards-based second. Here are brief overviews of the four types:
1. Rewards-based — Platform examples are Kickstarter and Indiegogo. There is no maximum funding and typical cost is 8-10 percent in fees. Individuals support a project financially, expecting to receive a non-financial reward (good or service) at a later stage (for free or for pay). You must reach your funding target. This is highly suitable for entrepreneurs and start-ups with a physical product. There is lack of exit options for backers and limited suitability to fund SMEs (small to medium enterprise)
2. Debt- or lending-based — Platform examples are Funding Circle and Kiva (non profit —up to $15,000 with 0 percent interest loan, but lenders are people who want to help small business). Maximum funding is $500,000 and typical cost is 5-27 percent in fees. Individuals lend money to a company/person, expecting the money to be repaid at a later stage with interest. This has the same pros as equity-based. The cons are that there is limited due diligence carried out by the platform on seekers. Investors must ask for more information
3. Equity-based — Platform examples are Seedinvest, Crowdfunder and EquityNet. Maximum funding is 1.07 million and typical cost is 3-6 percent in fees plus $10,000-$100,000 in professional fees. Individuals invest in a stake in a company, expecting a share of future profits (similar to common stock). This type offers a clearly defined financial return and suitability for funding of SMEs and entrepreneurs. The cons: it is limited to funding of companies with equity, and the entrepreneur gives up equity
4. Donor-based — A platform example for this crowdfunding type is GoFundMe. Individuals donate a desired amount to meet the funding aim of a specific project (charitable, artistic, religious), not expecting any financial return. You don’t have to hit your target to get it. This provides high visibility on philanthropy/charitable initiatives. It is less suitable for complex products and services
When choosing a platform to use for crowdfunding, check the company’s reputation, if the platform easy to navigate, if it is generating growth, whether fees and costs are clear and whether the platform been around for a while and safe to collect your money.
Keys to a successful crowdfunding campaign
1. You need a compelling story and video so you can sell your vision and how you will use the funds. You need it to be short and concise
2. Develop a timeline strategy both for you and external people (legal, accounting, videographer, etc.)
3. Pick the crowdfunding type that matches your investor’s needs
4. Develop a marketing plan and know your crowd. You will need to reach out to people in your network
5. Set your expectations for what amount you could raise, average by industry or region and how much work will it take
6. Communicate during the process with your crowd. Keep them updated and involved
If you are borrowing money or selling stock to the crowd (debt- or equity-based), there is no tax implication because that is on your balance sheet. Any interest paid to the crowd would be tax-deductible. If you are a charitable organization on a donor-based platform, you do not pay taxes on the money. If you are raising money by rewards based, there are tax implications and you should check with an accountant about that.
When considering spending time and money on a crowd funding project, remember that you have to have people in your network who would like to support you or it probably won’t be successful.