Crowdfunding has raised millions of pounds in the UK. Discover how you could use crowdfunding to help launch and grow your business today!
What is Crowdfunding?
Crowdfunding is a way of raising money to finance projects and businesses. It enables fundraisers to collect money from a large number of people via online platforms.
Using crowdfunding, startup companies or growing businesses can generate funds from alternative sources. It’s an innovative way of sourcing funding for new projects, businesses or ideas.
Crowdfunding is a great way of cultivating a community around your project/idea or business. By using the power of the online community, you can gain useful insights into that market you’re trying to tap into, as well as giving you access to new customers.
If you’re interested in how crowdfunding can help your business, we’re here to help. This guide is for entrepreneurs who are thinking about ways to finance a new business or idea, or have heard about crowdfunding and wish to learn more.
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How Does Crowdfunding Work?
Crowdfunding platforms are websites that enable interaction between fundraisers and the public. It is a way of sourcing capital for your idea or business.
Fundraisers are usually charged a fee by crowdfunding platforms if their campaign has been successful. In return, you can expect to be provided with a secure and easy to use service by their platform.
Many crowdfunding platforms operate using an all-or-nothing funding model. Therefore, if you reach your target, you get the money, and if you don’t, everyone will receive their money back. It’s a fairly straightforward model – no hard feelings and no financial loss.
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Main Types of Crowdfunding
Generally, there are five major types of crowdfunding used around the world. These include:
- Peer-to-peer lending – with this model, a large number of individual investors each makes a contribution to a person or business in the form of a loan. The loan is paid back with interest over time. It is similar to the traditional method of borrowing from a bank, except that a business borrows form many individual lenders instead of one bank.
- Donation-based crowdfunding – here, individuals donate to meet a fundraising goal for a charitable project. In this case, they won’t necessarily receiving anything in return. This is great model for social and community fundraisers, medical expenses and other charitable causes, and comparatively not the best for business.
- Rewards-based crowdfunding – this is similar to donation-based; however, the person donating does expect to receive a reward for their donation. Rewards can include a variety of things, such as product samples and t-shirts.
- Equity crowdfunding – this is the process of raising funds for your business by allowing investors and members of the public to buy shares in your business. In so doing, the investor becomes a shareholder of the business.
- Profit-sharing crowdfunding – with this model, business can share future profits with the crowd in return for funding. In this case, lenders are not shareholders as they only receive revenue when the project/business starts to generate money (not necessarily profit). This is often used for a new launch, such as a mobile app.
Crowdfunding Examples
- The Pebble E-Paper Watch – famous for being Kickstarter’s breakout success, raising $10,266,845 in 37 days.
- Ouya – an open-source game console, raising over $8.5 million in 29 days via Kickstarter.
- Good Night Stories for Rebel Girls – the most funded book series in crowdfunding history with more than $2 million being raised on Kickstarter and Indiegogo.
- GoHenry – a digital banking solution for kids, raised £6 million in a record-breaking equity crowding campaign.
- MoEa – a company using bio-materials, turning fruits and plants into sneakers. Raising 1176% more than their original goal of €10,000.
Benefits of Crowdfunding
- It doubles as marketing and media exposure – launching a crowdfunding campaign is an easy way to reach numerous channels. Therefore, pitching a project or business through the online platform can be a valuable route for marketing and result in media attention.
- Raise the funds you need to bring your idea to life – it can be a particularly fast way to raise finance with no upfront fees.
- It gives proof of concept – investors believe that if individuals invest in a startup before it provides goods or services, then more people will buy their products/ services when they eventually hit the market. Showing investors that your venture has received sufficient market validation at any early stage is hard. For this purpose, crowdfunding is a great tool.
- Gives the ability to engage the crowd and receive comments, feedback and ideas – as a result, you’re getting free market research! This feedback is greatly valuable as it can help you understand certain aspects of your business that you may not have thought of. It could also potentially inspire some new ideas!
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- It’s easier than traditional applications – applying for a loan can be a painful process, especially during the early stage of the company. However, thanks to crowdfunding, that application process can be a lot easier. Now, an entrepreneur only needs to choose a crowdfunding platform that best suits their campaign and effectively share their venture’s message to start their application journey.
- Protect from risks – starting up a company can be risky and challenging. However, launching a crowdfunding campaign reduces that risk as it allows entrepreneurs to test the waters without putting themselves at financial risk. This is because the funding process helps gauge market interest.
- It’s free! – On “all or nothing” crowdfunding platforms there is no fee to participate. And furthermore, if you fail to reach your goal there is no penalty. So why not give it a go?
The Best Crowdfunding Sites to Launch Your Business
- Kickstarter or Indiegogo – Best overall
- iFundWomen – Best for women
- GoFundMe – Best for charities
- Wefunder – Best equity crowdfunding
- Fundable – Best flat-fee option.
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