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Unlocking the Power of Crowdfunding: A Comprehensive Guide for Startups

Carl Niedbala - Founder Shield
Carl Niedbala

COO & Co-Founder

The global crowdfunding market is expected to grow exponentially from $1.67 billion in 2022 to $28.9 billion by 2028, boasting a flat 2022 compared to the declining venture capital (VC) landscape. While VC is regarded as the main funding source in the startup ecosystem, some companies might find a haven in crowdfunding, especially if they’re building a consumer-facing high-risk idea or during market downturns.

The Benefits of Crowdfunding for Startups

Crowdfunding is a means for startups to get funded online by multiple contributors or investors. Although these platforms usually charge a percentage fee for the amount raised, their main selling point is connecting startups with a diverse range of investors worldwide.

Startups can also garner massive visibility from crowdfunding. This exposure will help companies know where their product can improve pre-launch and gain market validation. Likewise, an online campaign can build hype around the product and garner future customers.

Crowdfunding is also a great option for ambitious ideas that might seem crazy initially but turn out to be a hit. For example, Oculus Rift, the virtual reality headset company, first launched its crowdfunding campaign in 2012 and received $2 million in funding. It seemed like a far-fetched idea back then, but now, the brand is known as the pioneer of modern VR headsets and was later acquired by Facebook for $2 billion.

The Different Types of Crowdfunding and Top Platforms To Source It

There are several crowdfunding models, which startups choose depending on the type of funding that meets their needs. Let’s explore the four major crowdfunding models.

Reward-Based Crowdfunding

Here, people contribute to a startup in return for a non-financial reward, usually the product or service. Reward crowdfunding is a way to gain online traction and get capital without losing equity. It best suits early-stage startups with a creative consumer-facing idea that might not qualify for loans or that may be considered too high-risk.

Kickstarter is a crowdfunding platform that has amassed over $7 billion in project funding. However, its model can be tricky: Founders set a funding goal they can only retrieve if they reach said amount during a certain period; otherwise, contributors get their money back.

Equity-Based Crowdfunding

With this crowdfunding type, individuals invest in a startup and receive shares or stock. This differs from the usual VC funding since crowdfunding works through a platform connecting investors and founders without creating a one-on-one relationship between them. Startups can also get smaller funding amounts from several investors than big amounts from a few.

Going the equity-based route is a good choice for companies with clear signs of profitability and good return possibilities for investors. AngelList is the most well-known platform for equity crowdfunding. As its name suggests, it helps pair companies with angel investors — so it’s all about early-stage startups. The site enables investors to form groups to pool money for a project with a minimum of $1,000.

Debt-Based Crowdfunding

For startups aiming to avoid bank loans with high interest rates, debt crowdfunding is a much better option. This entails investors contributing to a company expecting a return on investment with interest, like a bond. Loan amounts can go up to $500,000, collected within a few weeks to months and repaid within six months to five years.

This crowdfunding model suits later-stage companies and small and medium enterprises (SMEs) with a record of profits in the past. A platform that stands out is SMBX, which specializes in selling small business bonds with a minimum investment of $25,000 and an interest rate of up to 11.5%.

Donation-Based Crowdfunding

This type of funding is usually reserved for charity projects that don’t receive funding from investors or qualify for loans, and the general public contributes small amounts without a return or reward. GoFundMe is one of the biggest platforms for this, with America’s Food Fund that went toward food-insecure people raising $44 million in 2020.

How To Create a Successful Crowdfunding Campaign

A crowdfunding campaign is all about knowing the startup’s target audience and clear funding goals. Here are some key elements to create a successful campaign:

  • Set the right amount: This must come from calculating production costs, staff, research and development. Setting a goal too high could mean not taking any money home or scaring investors away while going too low is a financial disadvantage for the startup.
  • Offer worthwhile rewards: This can range from receiving the end product early to customizations or naming a product after an investor. These rewards shouldn’t cost the startup too much but must carry some sentimental or collectible value to the contributor. Perhaps extra accessories for the product, a discount or free service and company goodies like posters, mugs, calendars, etc.
  • Implement outstanding social media skills: Through the company’s social profiles, a marketing team can embody the startup’s mission, drop teasers and updates and interact with interested contributors. This is how companies can build engagement and enthusiasm for the product while proving their commitment to making their vision a reality.
  • Craft a creative and illustrative video: This is where a startup’s product can shine. The product or service’s goal must be explained to perfection and make viewers excited for a future with it. Here is where attention to detail and creativity matter the most during the crowdfunding campaign.

Legal and Ethical Considerations of Crowdfunding

One of the biggest risks of crowdfunding is launching too early or simply having poor planning since it leads companies to over-promise and deliver a faulty product or nothing at all.

Bad campaign management can also take companies to break platform rules and get suspended. Many founders go the crowdfunding route without knowing how time-consuming it can be and forget to deliver rewards on time and post few or no product updates, leaving investors in the blue.

To gain trust, young startups need to get dedicated startup insurance and let contributors know about this. This attracts investors by knowing that their investment is still safe if things go south with the project. Insurance can also help startups financially recover and come back stronger to achieve their entrepreneurial goals.

The Future of Crowdfunding

Equity-based crowdfunding is set to be the model with the most growth over the coming years thanks to regulations that allow non-accredited investors to pitch in responsibly and get shares in a company.

So, because there will be more access to investing, funding startups won’t be solely for the 1%. The ecosystem will open for more people, like middle-class investors passionate about certain initiatives.

With more people investing, more diverse projects can get funding. The future of crowdfunding points to more women and non-white founders getting capital for their startups — when they would otherwise not get attention from conventional VC investment.

Understanding the details of what coverage your startup needs can be confusing. Founder Shield specializes in knowing the risks startups face when delving into crowdfunding and ensuring you have adequate protection. Feel free to reach out to us, and we’ll walk you through the process of finding the right policy for you.

Want to know more about insurance for startups? Talk to us! Please contact us at info@foundershield.com or create an account here to get started on a quote.

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