One of the biggest challenges for any small business is getting financing to expand and grow into the future. Raising money from venture capital firms, or angel investor groups, or through debt financing all come with their own unique challenges that often leave small businesses struggling to fill the gap. Crowdfunding has increasingly filled in that gap over the last few years, with total global amount raised using crowdfunding surpassing $34 billion, almost a 1/3 of which was raised in Asia and the Middle East. Crowdfunding platforms like Kickstarter and Indiegogo have become household names as they continue to grow, with Kickstarter having raised more than $579 million in 2016 alone Real estate crowdfunding alone continues to be a dynamic and ever-evolving industry, growing to an estimated $3.5 billion in 2016. By 2025, the crowdfunding industry as a whole is anticipated to be valued at more than $300 billion. But how does crowdfunding work and how can you use it to fund your desired expansion plans?
In a crowdfunding campaign, large groups of individuals pool their money together to fund a company, organization, or project. However different crowdfunding platforms raise that money in different ways. In fact, there are actually four different types of crowdfunding: rewards, donation, lending, and equity.
In reward based campaigns, people invest in a company or project in exchange for a discount, freebie, product pre-order, or some other gift, usually in some form of the product or service the company sells. Donation based campaigns don’t offer anything material in exchange for donations, only the satisfaction of having helped raise money for a worthy cause or goal. In lending-based crowdfunding (also known as “peer-to-peer lending”), companies can raise money at competitive interest rates, where investors “bid” amounts of investment in exchange for their desired rate of return.
Lastly, there’s equity-based crowdfunding, which is probably the most suitable to for small business in need of capital. On these platforms, accredited investors, as well as everyday people, invest in businesses in exchange for ownership interest, just like any normal venture capital firm would.
There are 2 key benefits of equity crowdfunding for small businesses: marketing and financing. Crowdfunding provides a pretty unique marketing opportunity. Running a successful crowdfunding campaign requires business owners to promote themselves to a whole new audience and to convince their existing network of peers and friends to support the business.
Additionally, equity crowdfunding is designed to finance companies for the long term, as opposed to rewards-based campaigns where the relationship between the business and the crowdfunders ends once the reward is given. In contrast, equity investors have aligned interest to see the business grow into the future and are likely to spread the word and patronize the business since this helps them get a return on their investment as well.
This does not mean that crowdfunding is guaranteed to be a success. Indeed, investing in equity crowdfunding campaigns is a risky endeavor and many such campaigns fail to raise their target amounts of investment. However, crowdfunding is still evolving and can prove to be a rewarding avenue for small businesses to successfully raise capital and better secure their success.