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Types of Crowdfunding You Need to Know

Types of crowdfunding
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Every startup requires a capital investment, no matter how little. Sometimes your savings can be enough, but other times it’ll not. That’s why we recommend that you consider another source of business funds like crowdfunding. The good news is that the process is straightforward, and there’re many types of crowdfunding to consider for your funding goals.

So, if you’re at a crossroads on how to raise money for your amazing idea, keep reading this article.

Also, if you’re already running a business but looking for an alternative source of funds for expansion or execution of a new project, we got your back.

We will define crowdfunding, discuss important details about crowdfunding, and examine the types of crowdfunding available.

That way, if you only heard about crowdfunding but didn’t have the details, we’ll clear up many things for you.

Check it out!

What is crowdfunding?

Crowdfunding is simply a method of raising business money from a crowd of people.

It’s an online technique of gathering startup capital from many contributors instead of depending on a single individual or an entity.

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The crowdfunding method of capital solution is not a new practice.

Many startup companies and even existing businesses depend on it as alternative business funds.

It has helped many small businesses execute their business ideas, complete their new projects, and support their expansion strategies.

One interesting thing to note about crowdfunding is that it’s a fast way of attracting a large community to your business.

Everything about crowdfunding happens online.

So, it positions a business to gather market insights and new customers quickly.

How Does Crowdfunding Work?

Crowdfunding relies on a large community of people online to raise funds for businesses.

To achieve this, the facilitators create websites or crowdfunding platforms where the fundraisers and the community of people or crowd will interact.

That’s why your crowdfunding journey will usually start from locating crowdfunding platforms or websites to pitch your campaign.

The crowdfunding platforms facilitate the processes involved in moving funds from the crowd to the fundraiser.

People who want to support a particular startup make financial pledges on the crowdfunding website and redeem the pledges there.

As soon a funding campaign is executed successfully, the crowdfunding platforms charge a particular amount of money (fee) on the fundraisers.

In return, the crowdfunding platform operators create a secure and simple service for the fundraisers to achieve their goals.

In some crowdfunding methods, the people who donate money to a company startup or project will receive equity shares in the new company or get rewards.

Also, in some cases, if a fundraiser fails to reach the targeted amount of money from the campaign, he/she will not receive the money.

Instead, the platform operators will refund the money already accumulated to the owners.

But if a fundraiser meets the expected goal, he/she will receive the money.

Types of Crowdfunding:

There are many types of crowdfunding.

Each type is based on what contributors stand to gain for releasing their money to a fundraiser.

1. Donation-Based Crowdfunding

This type of crowdfunding is where people who render financial assistance to a fundraiser receive nothing in return.

Just like the name implies, it’s one of the crowdfunding methods that doesn’t offer anything to anyone contributing to a cause.

The contributors make these donations to support an idea and don’t demand anything in return from the fundraiser.

They do it willingly, either because the idea appeals to them or because they’re part of the cause.

This type of crowdfunding is usually used to support social causes.

Sometimes, it can provide disaster relief, pay medical bills, contribute to charities or non-profit making ventures.

To be successful in a donation-based crowdfunding campaign, all it takes is to pitch a cause worth pursuing or an issue that appeals to the community’s emotions.

In such a method, people donate small amounts to assist the fundraiser.

2. Rewards-based crowdfunding

In rewards based crowdfunding, individuals contribute their money to a company or business startup with the expectation of a reward.

It’s not like the donation-based type where nothing is received in return for contributions.

Instead, reward crowdfunding offers every contributor a chance to receive the product or services of the company raising funds.

Rewards-based crowdfunding is suitable for small businesses and other entities that want the support to execute creative projects.

One good thing about this rewards-based method is that the fundraiser is not going to offer monetary returns to the contributors.

Also, launching a rewards-based campaign is easy and often successful.

Once you capture customer’s hearts, they’ll contribute willingly for that chance to get your products or services.

The customers can also share the campaign themselves on many social media platforms to garner more contributors to the business or project.

But if you want your rewards based campaign to be successful, you must get a few things right.

The first is that your product or services must be such that it fills a need in a way that competitors can’t.

Secondly, you must share your service or product with many people and prepare convincing answers to their questions about what you offer.

But before you launch your rewards-based campaign, we recommend that you do the following:

Prepare a compelling pitch.

Your introduction of the whole idea starts at this point.

You need to prepare a well-structured narrative on who you are, about the company, what your company needs to carry out its plans for changing the world with an innovative service or product.

To achieve that, start by stating the problem as you see it.

Show how painful the problem you’ve discovered is and then introduce your solution, which might be your company’s services or the product you have created.

Afterward, describe the size of your target market to the people so that they’ll see the potential for success and donate towards your goals.

Prepare your elevator pitch.

This is a pitch that you can present to someone in a matter of seconds.

It’s encompassing, precise, and convincing.

Imagine that you have a business idea and need to present it to a venture capitalist in 30 seconds; that’s an elevator pitch — a condensed version of your whole pitch which you can present to someone even on the go.

Create your email pitch.

If you want to record groundbreaking success, you have to think and prepare a promotional pitch for your campaign.

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Some icons to send emails
Image by Tumisu from Pixabay

Your email pitch needs to be short, precise, and convincing.

That way, you can capture the entrepreneurs’ interest and gain their support.  

Record your company video.

Many people prefer videos representations of ideas to text.

So, creating a short, captivating video can go a long way to increase your campaign’s success.

Describe the product or service.

Invest a little time drafting a well-detailed product/service description to show how it works and why many people would be thrilled to get it.

Describe the rewards.

Since you’re running a reward based campaign, don’t forget to state the rewards clearly for the potential contributors to see.

Ask for funds.

After presenting all these details and promoting your campaign, you need to clearly state how much money you need for the business.

3. Equity Crowdfunding

In this type of crowdfunding, individuals who render financial assistance on crowdfunding platforms do it to be part of the company or business.

The contributors in this arrangement can be part owner based on equity shares, which they acquire by contributing the trading capital.

The shares which a contributor gets will depend on the capital he/she contributes to the business.

Each equity shareholder of a business usually receives a part of the company’s profit as a dividend, which also varied based on the number of shares.

One good thing about this crowdfunding method is that everyone who contributes money to the business will receive investment returns.

Hourglass with money in the background
Image by Steve Buissinne from Pixabay

It’s not like the rewards-based type that only offers a company’s product or service.

Instead, people can willingly contribute huge sums of money because they want to get a larger number of equity shares in your company.

So, if you’re aiming to raise higher business funds, this method is the perfect one for you.

But bear in mind that the campaign is more demanding than others.

You have to plan it very well and also execute it carefully to achieve your goals.

Some of the things you must do for a successful equity-based crowdfunding campaign are as follows:

– Set clear terms.

Some of the terms to set for your goals include deciding on the target amount.

You must first determine the amount of money you need to start up the business.

Next, you must also decide on the duration the campaign will last, but that’ll depend on your preparedness before the process starts.

– Decide between convertible debt or equity.

How are you going to offer ownership in the business?

Will you offer straight equity or convertible debt?

In the first option, contributors get instant ownership of the business while the latter offers them shares in a later round.

– Complete the valuation of your business.

Before starting the crowdfunding campaign for financial assistance, you need to get your company’s current value.

Once you’ve determined the amount it’s worth, you must add the amount of money you’re aiming to raise in the crowdfunding platforms.

– Decide on the dilution you can accept.

Since it’s equity-based crowdfunding, the business will no longer belong to your alone.

Other people will be part-owners, and your ownership percentage will automatically reduce.

So, before you start, decide on the level of decrease you can accept.

– Gather your relevant documents.

There’re some documents or information you need at the tip of your fingers before launching. Some of them include;

  1. Executive summary
  2. Terms of the fundraise
  3. Business plan
  4. Pitch deck and
  5. Financial
  6. Document

Making all these preparations will help you avoid delays, prepare you comprehensively, and achieve your financial goals.

4. Debt-based crowdfunding  

Here is another type of crowdfunding method that many people utilize in crowdfunding platforms to get financial assistance.

In debt-based crowdfunding, the fundraiser might be a company or an individual looking for people who’ll lend money to them.

It’s a situation where someone will prefer to borrow money from lots of people instead of depending on one source.

In return, the people who lent money to the fundraiser will receive a certain amount of interest on the loan.

The company or individual will repay the total money plus the interest at set intervals, monthly until the last repayment.

We recommend this type of crowdfunding for entrepreneurs who don’t want to share their company’s ownership.

It allows them to get the financial assistance they need at the cost of paying interest only.

So, if you’re looking to borrow money for your business, debt-based crowdfunding is worth considering.

5. Real Estate Crowdfunding

This type of crowdfunding is becoming prominent in the real estate industry.

Instead of depending on the stringent process of acquiring loans from traditional lenders, investors rely on crowdfunding platforms to raise money.

In this crowdfunding method, the investors to a real estate property are all the people who contribute their money to buy it.

Real estate crowdfunding is like a community investment where many people pool their resources to acquire a particular property and receive returns from the property in percentages.

Instead of one individual bearing the hassles, the stress, and demands of owning a real estate property, many people share the responsibility.

Mostly, a real estate company usually collects the funds and also disburses the payouts to investors.

Final Words

Crowdfunding Is a legit and dependable source of business capital.

But your campaign may fail if you don’t handle the marketing aspect well.

Yes!

You have to see it as another marketing project because you must plan, strategize, and put in enough effort to achieve it.

We have shared the main types of crowdfunding which you can utilize depending on what works for you.

If you want to raise a huge amount of capital, you need equity-based crowdfunding.

But you must be willing to share the ownership of your company.

Other types of crowdfunding examples offer different methods and demands.

So, consider them carefully and choose the best one for you.

Remember, your crowdfunding campaign must be great and convincing to ensure your success.

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