Crowdfunding is an alternative financing solution that is becoming more prominent for startups and small business funding in the United States. Rather than being forced to go through a traditional banking system for funding or accepting a money loan for their business, there is now an alternative solution available through crowdfunding, in which the entrepreneur has their own target market at their disposal. When it comes to raising money for a business, crowdfunding is more than just a way to bring home capital.
But not all crowdfunding campaigns are created equal. The two most popular platforms for crowdfunding, equity crowdfunding and reward-based crowdfunding, are suited for two different sets of business objectives. Your decision on which one to pursue could make all the difference between owning the company entirely, securing the right supporters, and growing it as planned.
Knowing How Crowdfunding Works
Generally, crowdfunding is a means by which people can invest their funds in your business (start-up or any business idea), primarily using the internet. It is believed that for entrepreneurs, raising money for a business is easier compared to obtaining a business loan or capital from an investor. Furthermore, it allows entrepreneurs to check whether consumers would be interested in the product before putting time, capital, and resources into the development of the business model.
But in case you don’t choose the right type of crowdfunding, you could end up handing out too much equity, having your expectations high about what you think you could do, or simply being under too much pressure. This is a very important step in your process, as you need to learn about every type of crowdfunding possible.
Equity Crowdfunding: Shared-Ownership Capital
With equity crowdfunding, contributors get to invest in your company in return for shares or ownership stakes. This is one model wherein backers start to become investors, and not just supporters of the idea.
Advantages
- Access to larger funding amounts compared to the reward-based models.
- Appeals to serious investors who focus on long-term growth.
- Establishes credibility and confidence with regulators of investment structures.
Disadvantages
- Early-stage dilution of ownership
- Legal, compliance, and reporting requirements
- More pressure for financial returns
Depending on your founders’ high growth potential in raising money for a business, equity crowdfunding can be effective. It might not be the best route if your goal is control or if your business model is still evolving.
Reward-Based Crowdfunding: Community Building at Its Core
This type of crowdfunding for small business enables fans to generously give money in return for non-binding promises, such as product early access, exclusive branded goods, or even some special events. Actually, backers do not get any ownership stake in a company.
Advantages
- No shares are diluted
- Community and brand engagement get stronger
- Market validation through product pre-launch
Disadvantages
- Funding amounts are generally smaller
- Risks that come with ramping up, fulfilling orders
- There is a great dependence on marketing for campaign success
It is an attractive option for many business leaders who are focused on raising money for a business. Not only does it allow founders to concentrate solely on growth, but it also does not require them to give up any equity, thus enabling them to convert the supporters into payers and get customers’ loyalty.
Preventing Ownership Dilution
Giving equity too early has been one of the biggest fears for start-up owners. Too early capital raising might result in start-up owners being stuck with an unfavorable equity distribution. Reward-based equity crowdfunding could be very helpful in this situation and could help you in raising money for a business start-ups successfully. In the situation of many start-ups, in the future, investment involving crowdfunding financing and eventual private investment can be more rational than equity dilution financing.
Building a Community Based on Your Vision
Crowdfunding can produce relationships, not just resources. The most successful campaigns also tell a story and demonstrate transparency and confidence. We’ve had people you don’t know contributing to your idea every penny and many dollars at a time. They are going to want to feel as though they are a part of your journey, especially when your business has the power to solve a real problem. When you engage your audience prior to starting your campaign, you create advocates who will promote your idea naturally. When your competitors are abundant, a community-first model can prove to be a bigger advantage than immediate cash flow today for the future of your business.
Conclusion
Crowdfunding provides today’s entrepreneurs with the freedom of raising money for a business that isn’t strictly limited to conventional funding methods. Equity crowdfunding that offers bigger capital access but also requires trade-offs in ownership, and reward-based crowdfunding helps to build a fanbase and avoid dilution. You can select the model that supports long-term growth and success by looking closely at your desired reach and stage or phase of development while preserving a company vision throughout the business.
