What is crowdfunding?
Crowdfunding is a way for your clients to raise business capital, either by pre-selling products, giving gifts or, in some cases, selling equity. Crowdfunding platforms are estimated to raise more than $30 billion a year. It’s a highly organized community and, because it’s online, successful fundraisers get instant access to their freshly raised capital.
An alternative to traditional models
Raising capital to launch new products or fuel business growth can be challenging. Banks often need to see an established cashflow, or require significant collateral to borrow against.
Angel investment and venture capital are alternatives, but they generally come with strings attached. Investors want to be involved in business planning and decision-making, which might scare your client.
Crowdfunding is the “other way” but you shouldn’t think of it as a last resort or a long shot. It can generate capital while leaving your client in control of their business.
Understand the difference between crowdfunding platforms
CrowdFund Beat lists some of the hundreds of crowdfunding websites but it’s by no means exhaustive. If a client asks you about crowdfunding pros and cons, start by explaining that there are many alternatives.
Platforms for social campaigns and small businesses
Some crowdfunding websites have become household names. They’re often in the news for the left-field ventures they’ve launched. While businesses use these sites, they also often feature individual, charity and culture projects:
- Platforms for small, medium and large businesses
Clients that need capital to grow an existing venture can find more business-focused platforms. These crowdfunding sites are frequented by people looking for solid investment opportunities. There are many platforms in this space, but some of the bigger ones include:
What will your client have to give up?
Crowdfunding is a legitimate way for your clients to raise capital, but they’re going to have to give something up to get the cash.
When you brief them on the pros and cons of crowdfunding, you’ll need to explain the different relationships between fundraisers and investors. These will change depending on the type of crowdfunding they pursue.
- Rewards-based crowdfunding: Backers give a small amount of money in exchange for a non-financial reward, such as products, discounts or early access to products.
- Debt or lending-based crowdfunding: Backers make a loan to your client’s company, which must eventually be repaid with interest.
- Equity-based crowdfunding: Backers invest significant amounts of money in your client’s business in exchange for equity.
- Donation fundraising: it is for social projects. You can use this diagram to help explain the types of crowdfunding to your client.
Breaking down crowdfunding pros and cons for your clients
Lending-based and equity-based crowdfunding mimic traditional financing models, but with important differences. Rewards-based finance is at the heart of most crowdfunding media stories and is probably the best-known model. It tends to attract micro-financing, however, so success is reliant on motivating many people to back a project.