Guide to Crowdfunding for Startups and Businesses

Lauren WardUpdated September 13, 2022

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Whether you’re interested in crowdfunding to start a new business or expand an existing one, this alternative method of financing can be a viable way to pump some life and energy into whatever project you’re working on. In addition to raising capital, crowdfunding can also help build awareness and excitement about your product, service, or company. Here’s some helpful info to know about crowdfunding before you jump in.

What Is Crowdfunding?

Crowdfunding is a method of financing a business venture, project, or cause by collecting small amounts of capital from a large number of people (a.k.a, the “crowd”) through an online platform. A crowdfunding campaign usually has a monetary goal in mind and a set deadline to reach it. Depending on the type of crowdfunding you choose, you may need to repay a loan or provide some sort of incentive to those who invest in your campaign. Financial pledges can be made and collected through the crowdfunding platform. Crowdfunding platforms typically charge fundraisers a fee if the fundraising campaign has been successful. Many platforms operate an all-or-nothing funding model. This means that if you reach your target, you get the money; if you don’t, everybody gets their money back, and there’s no financial loss.

When Did Crowdfunding for Businesses Start?

Modern day crowdfunding got its start in1997 when a British rock band (called Marillon) raised funds for their reunion tour through online donations from fans, who were eager for them to come to the United States.The band’s unconventional approach to financing led to the creation of ArtistShare, a site designed to help musicians raise money to produce albums or go on tour, in 2001. ArtistShare became the first dedicated crowdfunding platform. Shortly thereafter, more crowdfunding platforms began to emerge, and the crowdfunding industry has grown consistently each year since.

What Can Crowdfunding Be Used For?

Crowdfunding offers a way for businesses or individuals to raise money online for their business, startup, new product or project, or personal cause. It can be especially helpful for entrepreneurs just starting out, who may not qualify for different types of small business loans from a bank and can’t (or don’t want to) borrow from family. There are many types of crowdfunding, but the process generally allows users to raise money without going into debt, which is why it’s so appealing to so many small business owners who need to save every dollar they can.The money you generate through crowdfunding, however, must be used for the exact purpose you share with your donors or investors on your crowdfunding site.

10 Popular Crowdfunding Sites for Small Businesses

Whether you’re looking for a small infusion of cash to jump-start your business or a large amount of capital to take your company to the next level, here are 10 sites that may be able to help you raise the money you need.

1. IndieGogo

Since 2008, IndieGogo has helped bring more than 800,000 innovative ideas to life. It’s also chock full of resources to help your campaign succeed. You can even tap into support to help make the most of your marketing efforts.

2. Kickstarter

Kickstarter is one of the largest and best known crowdfunding sites. The funding you raise on the platform is all or nothing, meaning you don’t receive any money if you don’t reach your campaign goal.

3. GoFundMe

This fundraising site has a 0% platform fee and is easy to use. Plus, you don’t have to reach your campaign goal to access your raised funds.

4. Mightycause

Focused on charitable giving, Mightycause offers individuals and nonprofits a low-cost platform for raising money for their causes. The site offers flexible options, including year-round fundraising, peer-to-peer fundraising, giving days, and special events.

5. SeedInvest

SeedInvest is focused on providing a way for investors to back early-stage startups, making it a good choice for new ventures looking for seed capital.

6. CircleUp

This platform focuses on companies that sell directly to consumers and offers both equity capital and credit financing. You could be partnered with investors and get help with distribution and operations.

7. Crowdfunder

If you have a Shopify store and are interested in crowdfunding a new product through your own website, the Crowdfunder app can help you do that. The app enables you to accept pre-orders from people who are interested in your idea, and avoid paying fees to a crowdfunding platform.

8. EquityNet

If you’re interested in attracting equity investors, you may want to post your profile and business plan on EquityNet. This platform connects entrepreneurs with a large network of angel investors, venture capitalists. and business supporters.

9. Fundable

You can opt for equity or rewards-based fundraising on this platform. Fundable recommends the rewards option for startups seeking smaller amounts of capital that have something of value they can offer in exchange for funding, and the equity option for companies seeking larger amounts of capital that already have some traction.

10. MicroVentures

MicroVentures connects angel investors with startups that need at least $150,000 to $1,000,000 in capital.

How Crowdfunding for Small Business Works

No matter which site you choose, building a crowdfunding campaign generally involves three steps. They are:

Creating the campaign
Marketing the campaign
Raising money with the intention of reaching the target goal. Some platforms require crowdfunders to reach their goal in order to keep any of the money raised, others do not.

Creating the Campaign

The campaign phase is where you state what you’re trying to fund and why. It could be an idea for a new business, product, or even service. Many successful campaigns spend a lot of time making compelling, easy to understand videos about why financial assistance is needed (and why crowdfunding is their best option). They clearly state what the money will be used for and why they need the amount that they do. Generally, telling a compelling story can be an important step in creating the overall crowdfunding campaign. Frequently, crowdfunding campaigns convey the business owner’s personal story and their reason for doing what they do. This process is very similar to writing a business plan.

Marketing the Campaign

Creating a crowdfunding campaign is just the first step. You’ll also likely need a plan for marketing it to reach people who may be interested in supporting your business. Your “investor” is anyone who chooses to donate money to your campaign (and who is also probably your company’s target audience). Crowdfunding “investors” or “donors” choose to fund a business or project because they want early access to a particular product, but many simply do it because they want to help.As you may expect, this part of crowdfunding can take some work. Generally, people who donate to crowdfunding campaigns don’t spend time looking for someone or something to give their money to. They must be found and convinced of your business’s unique value. Depending on the type of business you run, some ideas to market and promote your campaign may include:

Spreading the word on your company’s website and social media channels.
Using promoted posts on social media.
Doing interviews for online blogs, podcasts, or other media.
Attending conventions, business fairs, or local community events.
Distributing flyers, pamphlets, or other promotional materials in your community.

Reaching the Target Goal

Reaching your target money goal (or getting as close to it as you can) is the last phase to crowdfunding. Depending on which crowdfunding platform you choose, you may or may not get to keep the money if you don’t actually reach your goal. Be sure to pay attention to these details before you choose a final option.However, some companies use crowdfunding not just as a source of money, but also as a way to test the market and get valuable feedback. You may be able to find out if there’s a demand for your business and what people like and don’t like about it. Recommended: What's a Lean Startup?

Different Types of Crowdfunding

As a business owner you usually have access to four basic types of crowdfunding: equity crowdfunding, donation crowdfunding, reward crowdfunding, and loan crowdfunding.

Equity Crowdfunding

With equity crowdfunding, you’re usually selling a portion of your company in exchange for money at a later date. This means that whenever your company is profitable, a portion of your profits must go to your investors. This type of crowdfunding does come with some legal tight ropes to walk across, but it can be done.

Donation Crowdfunding

Donation crowdfunding is exactly what it sounds like. It’s when a person donates money to your crowdfunding campaign without expecting anything in return. They do so because they respect your business or cause and want it to succeed. Though donation crowdfunding sounds like the best, it may be the hardest to do well in. Generally speaking, people who are successful with this type of crowdfunding are usually with a charity or tackling a social issue head on.

Reward-Based Crowdfunding

With reward-based crowdfunding, contributors receive a sort of reward for contributing money. This type of crowdfunding is also called exchange crowdfunding and the reward often varies based on the amount of money that is given to the campaign. Businesses may send contributors the new product for which they’re raising funds. One of the more famous examples of this is when the Japanese game maker Yu Suzuki started a Kickstarter campaign to raise money to develop a video game, Shenmue 3. As part of the campaign, certain contributors received a copy of Shenmue 3. He originally asked for $2,000,000, but he instead raised $6,333,295.

Loan Crowdfunding

Loan crowdfunding, also known as peer-to-peer lending or marketplace lending, is when a person or company borrows money from a group of people as opposed to a bank or credit union. The money is to be paid back by agreed upon dates and interest levels. Crowdfunding business loans may offer lower interest levels than traditional loans, and there is not as much red tape to work through. Examples of loan crowdfunding are Mainvest and Prosper.

Do You Pay Back Crowdfunding Money?

Whether or not you are expected to pay back crowdfunding money depends on which type of crowdfunding for small business you choose.Equity Crowdfunding: With this type of crowdfunding, investors aren’t repaid for their specific contribution. Instead, they become shareholders in the company, earning a proportionate slice of equity in the business venture. So as the company grows, you’ll be required to share a portion of your profits in dividend payments with your shareholders as long as your business is in operation.Donation Crowdfunding: You do not have to pay any money back received in a donation crowdfunding campaign. In this type of campaign, money is typically given without any expectation of a return.Reward-Based Crowdfunding: You are not required to pay back any money in an exchange crowdfunding campaign, but you are expected to send your funders an agreed upon reward once it is ready.Loan Crowdfunding: With loan crowdfunding you are expected to pay back any money you receive. Payback dates and interest levels are agreed upon beforehand.

Regulations of Crowdfunding for Startups

Under new rules from the Securities and Exchange Commission (SEC), startups can raise up to $5 million over a 12-month period through crowdfunding without undergoing the SEC’s registration process, which can be a complex and cumbersome process. Small- to mid-size companies engaged in a first-time equity offering can raise up to $75 million over a 12-month period while remaining exempt from SEC regulation requirements.

Pros and Cons of Crowdfunding for Small Businesses

As with all methods of financing, crowdfunding comes with its pros and cons.

Pros of Crowdfunding for Small Businesses

Here are some advantages of crowdfunding:

It can be a great way to test the market. If you have a business idea but you’re not sure if the market will respond to it or not, crowdfunding allows you the opportunity to turn it into a proven concept. However, if your campaign doesn’t reach a lot of investors or supporters, then that may be a sign you need to pivot your business strategy and idea.
The market finances your business or product. You’re not typically taking unnecessary risks with your finances. Instead, the market is taking most of the financial responsibility.
It can create buzz and excitement about your product. A successful campaign will generate awareness and excitement over your business and product, which is time and effort well spent for many reasons. It can accelerate you past competition and years of struggle.
It could help you raise more than you expect. Obviously, the purpose of crowdfunding for small business is to raise money, but it’s possible to raise more money than you originally requested. It’s rare, but it does happen for some businesses. This is why it is so important to put everything you have into your campaign.

Cons of Crowdfunding for Small Businesses

Here are some of the disadvantages of crowdfunding:

It’s not as easy as it sounds. It’s a lot of work to launch a successful crowdfunding campaign. It’s not as simple as signing up and telling people how much you need. For example, many successful campaigns usually end up spending money on marketing and getting a professional to shoot their video.
YOU have to find a way to reach contributors. Whatever platform you use to crowdfund typically isn’t going to advertise your campaign or make sure it reaches the right investors.
You may not get the money if you don’t meet your funding goal. With crowdfunding, you typically have to raise a certain amount of money by a certain date or you may not be able to keep any of the funds.
Competition can be stiff. Depending on your industry and niche, you may have thousands of campaigns to compete against.

Alternatives to Crowdfunding

While crowdfunding can be a unique and exciting way to fund your business, it isn’t for everyone. Here are some other ways you may be able to raise capital to start or grow your small business.

Small Business Loans

More established businesses can apply for small business loans through banks, credit unions, and online lenders. Small Business Administration (SBA) loans may also be available if you have trouble qualifying for traditional financing. The SBA also offers microloans for startups.

Venture Capital

Venture capital, also known as VC funding, is a type of equity financing provided by private investors to startups and small businesses that anticipate high growth and a need for significant funding to sustain that growth. In return for their investment, venture capitalists typically take a percent of ownership in the company.

Angel Investors

Finding angel investors is another potential avenue for small business financing. An angel investor is typically a high-net-worth individual who offers financial backing for small startups, typically in exchange for ownership equity in the business. Angel investors could be knowledgeable and wealthy industry experts, but they might also be just friends and family who want to help.

Small Business Loan Rates

Crowdfunding is one of many ways you can raise capital to start or expand your business. If you’re interested in exploring other types of business financing, Lantern by Sofi can help. With our easy online lending tool, you can quickly review and compare small business loan options matched to your business’s needs and qualifications. There’s no obligation and you only need to fill out one short application.

The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.LCSB0622016

About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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