How Can I Utilize Crowdfunding for My Startup?

How Can I Utilize Crowdfunding for My Startup?

At EGFS we are strong believers in the potential of crowdfunding as a source for supporting and augmenting your growth. We know what’s possible as consultants who have worked with some of the best like Indiegogo, who was a client for over 3 years, to other rising stars like Startengine and Crowdfunder.

We have seen several clients that have benefitted and been able to get major projects off and running from starts that came through crowdfunding sites. Former client Ouya raised one of the largest recorded amounts on Kickstarter when they successfully attracted 8M, more than 900% of their original goal within 8 hours!

That kind of social feedback and financial motion then led to having venture capitalists inquiring for further investment as well. When it comes to capital for startups, you don’t want to leave any possibility unreviewed. So with that here’s what you need to know about the options out there.

What is Crowdfunding?

Crowdfunding is using a collective of investors, the crowd, usually assembled through social sites, to infuse cash into a business or project. A proliferation of sites over the last several years has created a rapidly growing arena with billions of dollars awaiting. Funding volume has grown, according to statista.com, from $530 million in 2009 to over $16 Billion in 2014.  Crowdfunding is also a great tool for getting real time feedback on market interest, creating brand recognition and attracting larger investors for further fundraising down the line.  

What types of Crowdfunding exist?

The first step is asking what are the types and how can each best serve the financial needs of your startup. There are four distinctly different types of crowdfunding and each serves a purpose.  

Rewards Based:  

This is the most common and popular type of crowdfunding. It works best for startups looking for short term infusion, typically within 1-3 month windows and for amounts in the $100K and under range.  

As the name implies donors are rewarded, often with early product access or similar in exchange for their investment. There are varying levels of rewards with 3 or more levels being ideal. In addition to raising capital this is a worthy marketing and proof of concept tool and demonstration to larger investors later on of early customer interest and potential market value.

Recommended Sites and their Fees

The two most popular sites are Kickstarter and Indiegogo. The biggest difference between the two platforms involves goals and payout. While both charge a 3% – 5% processing fee, Kickstarter requires that you meet your goal. When goals are not met, no fees are charged and all monies are returned. With Indiegogo, your startup will receive all investment, subject to the fees, whether part or all of the goal is ultimately achieved.

Donation Based:

This type of crowdfunding is also quite well-recognized, generally servicing social causes and charities. Thus the bulk of these campaigns are individuals but may also benefit non-profit startups. With donation based crowdfunding you are not required to provide anything in return, thus this type works best for amounts under $10,000 and for campaigns of 1-3 months.

Recommended Sites and their Fees

Leaders in the field are GoFundMe and Crowdrise.  GoFundMe charges a platform fee of 5% and processing fees ranging from 1.4% to 2.9%. While Crowdrise has similar platform and processing fees they additionally offer the option for donors to cover all fees, thereby providing totally cost free fundraising.

Equity Based:

With equity based crowdfunding investors give $1000, or typically more, in return for a small piece of the company. This may be your startups first step before going on to raise money from angel investors or venture capitalists. It is best for launching or growing existing startups that are beyond the project stage.

New Developments in the Field

The recently passed JOBS Act opens up equity stakes to non-accredited investors. The act allows non-accredited investors to participate under limited circumstances, including the possibility of incurring large fees to the company or startup utilizing equity based crowd funding.  It is highly recommended that you consult with an accounting professional to ensure compliance if you use equity based crowdfunding to fund your startup.

Recommended Sites and their Fees

Startengine, Crowdfunder, AngelList, CircleUp and Fundable are notable sites. Due to the new developments posed by the JOBS Act, most equity based crowdfunding are still focused on accredited investors, but we expect the opportunities to keep growing.

WeFunder plans to open up equity stakes to non-accredited investors as soon as possible.

Debt Based:

Debt based crowdfunding allows for the bundling of many small loans into one larger loan. No equity or rewards are offered but rather a return of the investment amount plus interest.

Recommended Sites and their Fees

Lending Club and Prosper are two debt based crowdfunding sites. Fees include interest to the investor as well as site fees for origination of the loans and any servicing or collections. As such they can vary.

Disclaimer: This article discusses general developments. Such materials are for informational purposes only. Early Growth Financial Services expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this article.

If you have any further questions, contact Early Growth Financial Services for a free 30-minute financial consultation.

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