By Rachelle Hare, Senior Commercial Lawyer and Business Adviser, Owner of Blaze Business & Legal, 19 November 2023. Rachelle has been advising startups both legally and commercially for over 23 years.
Chapter 6 of the Ultimate Guide to Startup Funding
Introduction
Crowdfunding has emerged as a powerful funding method that allows startups to raise capital from a diverse audience of backers. It democratises the fundraising process by enabling entrepreneurs to connect directly with potential supporters.
In this chapter, we discuss crowdfunding as an alternative funding method, explain the different types of crowdfunding (rewards-based, equity-based, and peer-to-peer lending), provide insights into popular crowdfunding platforms, discuss the benefits and challenges of crowdfunding, and offer actionable advice on how to launch a successful crowdfunding campaign. Crowdfunding can be a game-changer for startups seeking capital, so read on and learn how to leverage this funding avenue effectively.
What is Crowdfunding?
Crowdfunding is a fundraising method that involves raising capital from a large number of individuals or organisations, often through online platforms. It allows entrepreneurs to present their ideas, projects, or businesses to a broad audience and solicit financial contributions.
Crowdfunding is characterised by its accessibility, transparency, and ability to engage backers directly.
Types of Crowdfunding
Crowdfunding can take various forms, depending on the nature of the campaign and the benefits offered to backers. The three primary types of crowdfunding are:
1. Rewards-Based Crowdfunding
In rewards-based crowdfunding, backers receive non-financial rewards or incentives in exchange for their contributions. These rewards can include early access to products, exclusive merchandise, or special experiences. This approach is commonly used for creative projects, product launches, and artistic endeavors.
2. Equity-Based Crowdfunding
Equity-based crowdfunding involves offering equity ownership or shares in the startup to backers in exchange for their financial support. Backers become shareholders and have a vested interest in the startup’s success. This type of crowdfunding is regulated and subject to securities laws in many countries.
3. Peer-to-Peer Lending Crowdfunding
Peer-to-peer (P2P) lending crowdfunding allows individuals to lend money directly to borrowers, including startups, in exchange for interest payments. P2P lending platforms connect borrowers with individual lenders, bypassing traditional financial institutions.
Popular Crowdfunding Platforms
Numerous crowdfunding platforms have emerged, each catering to different types of campaigns and backers. Here are some popular crowdfunding platforms (for information purposes only):
- Kickstarter – Known for rewards-based crowdfunding, Kickstarter is a platform where creators showcase their projects and offer unique rewards to backers. Projects must reach their funding goal to receive the pledged funds.
- Indiegogo – Indiegogo offers both rewards-based and equity-based crowdfunding options. It provides flexibility in campaign types and allows creators to choose between fixed or flexible funding models.
- Seedrs – Seedrs specialises in equity-based crowdfunding. It connects startups with a community of investors looking to buy shares in early-stage businesses. Seedrs handles all aspects of the investment process.
- GoFundMe – Primarily used for personal and charitable causes, GoFundMe allows individuals to raise funds for various needs, including medical expenses, education, and emergencies.
- LendingClub – LendingClub is a prominent P2P lending platform that facilitates loans for individuals and small businesses. Investors can earn returns by lending money to borrowers.
Benefits of Crowdfunding
Crowdfunding offers several advantages to startups and entrepreneurs:
- Access to Capital – Crowdfunding provides access to a large pool of potential backers, allowing startups to raise funds from a diverse audience.
- Market Validation – A successful crowdfunding campaign can serve as validation of your product or idea, demonstrating demand in the market.
- Customer Engagement – Crowdfunding engages early supporters who become advocates for your brand or project. They can provide valuable feedback and insights.
- Capital without Equity Dilution – Rewards-based and P2P lending crowdfunding models allow startups to raise capital without giving up equity ownership.
- Marketing and Exposure – Crowdfunding campaigns generate buzz and media attention, providing valuable marketing exposure.
Challenges and Considerations
While crowdfunding offers many benefits, it also presents challenges and considerations:
- Campaign Effort – Running a crowdfunding campaign is a significant undertaking that requires planning, marketing, and ongoing engagement with backers.
- Fulfillment Obligations – Entrepreneurs must fulfill rewards or repayment obligations to backers, which can be logistically complex.
- Competitive Landscape – Crowdfunding platforms are competitive, and standing out among other campaigns requires a compelling pitch and effective marketing.
- All-or-Nothing Models – Some crowdfunding platforms operate on an “all-or-nothing” model, meaning campaigns must reach their funding goal to receive the pledged funds.
- Regulatory Compliance – Equity-based crowdfunding is subject to securities regulations, and compliance with these laws is essential. You will need legal advice.
Things to Consider when Launching a Crowdfunding Campaign
If you’re considering crowdfunding for your startup, follow these steps:
- Get Professional Advice – Speak with your advisers, and particularly your Accountant, before you take any action towards crowdfunding.
- Choose the Right Platform – Select a crowdfunding platform that aligns with your campaign type (rewards-based, equity-based, or P2P lending).
- Craft a Compelling Campaign – Create a compelling campaign page that clearly communicates your project’s purpose, benefits, and impact. Use engaging visuals and storytelling.
- Set Realistic Funding Goals – Determine the funding amount you need to achieve your project’s objectives and set a realistic goal. Consider expenses, rewards, and platform fees.
- Plan Your Rewards – If running a rewards-based campaign, plan attractive rewards that resonate with your target audience.
- Create a Marketing Strategy – Develop a marketing strategy to promote your campaign across various channels, including social media, email, and press releases.
- Engage with Backers – Actively engage with backers by responding to comments, providing updates, and fostering a sense of community.
- Prepare for Fulfillment – Have a clear plan for fulfilling rewards or repayment obligations to backers.
Scenario
Michael is a dedicated social entrepreneur who is keen to promote environmental sustainability. He envisions launching an eco-friendly product line that not only reduces environmental impact but also encourages sustainable living. With his innovative ideas and a commitment to making a difference, Michael turns to crowdfunding as a means to fund his venture.
Launching the Eco-Friendly Product Line
- Concept Development – Michael spends months refining his eco-friendly product ideas, meticulously designing prototypes, and conducting market research to identify the demand for sustainable alternatives.
- Planning the Crowdfunding Campaign – Recognising the potential of crowdfunding, Michael carefully plans his campaign. He sets clear funding goals, calculates production costs, and determines the rewards he can offer to backers.
- Creating a Compelling Campaign Page – Michael creates an engaging crowdfunding campaign page that showcases his product line’s unique features, benefits, and environmental impact. He uses captivating visuals and persuasive storytelling to connect with potential backers emotionally.
Navigating Rewards-Based Crowdfunding
- Choosing the Right Platform – Michael selects a rewards-based crowdfunding platform that aligns with his project’s mission and target audience. He reviews the platform’s fees, rules, and guidelines to ensure a smooth campaign experience.
- Setting Reward Tiers – Michael carefully structures reward tiers to entice backers at various levels. He offers exclusive early-bird pricing, eco-conscious merchandise, and even the opportunity for backers to be part of the product development process.
- Engaging with Backers – Throughout the campaign, Michael actively engages with backers through regular updates, responding to comments and questions, and expressing gratitude for their support. He fosters a sense of community and connection.
Building a Supportive Community of Backers
- Leveraging Social Media – Michael leverages the power of social media to amplify his campaign’s reach. He shares compelling stories, behind-the-scenes content, and eco-conscious messages to resonate with a broader audience.
- Collaborating with Influencers – Michael collaborates with environmental influencers and sustainability advocates who share his vision. They promote his campaign to their followers, increasing visibility and support.
- Tapping into Environmental Networks – Michael actively participates in environmental forums, communities, and events. He connects with individuals and organisations passionate about sustainability, encouraging them to back his campaign.
Achieving Crowdfunding Success
- Exceeding Funding Goals – Thanks to Michael’s meticulous planning, engaging campaign, and dedicated community-building efforts, his crowdfunding campaign surpasses its funding goal. The support from backers allows him to move forward with production and launch his eco-friendly product line successfully.
Michael’s journey in crowdfunding demonstrates the power of passion, community, and sustainability. Through strategic planning, effective engagement, clever marketing and a commitment to environmental values, he not only funded his venture but also built a loyal community of backers who share his vision for a greener, more sustainable future.
What’s Next?
In the next chapter, we’ll explore another funding avenue for startups: small business grants. We’ll consider the concept of small business grants, explain the sources of grants (government, companies, philanthropists), discuss eligibility criteria, and offer guidance on crafting persuasive grant applications. Small business grants can provide non-repayable funding opportunities, and we’ll teach you how you can pursue them effectively.
Check out Chapter 7: Small Business Grants now.
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About the Author
Rachelle Hare
Rachelle Hare is a highly experienced Construction Lawyer and Contract Lawyer, with over 23 years of experience in Tier 1 and Tier 2 Construction Firms, Top Tier Private Practice and Government.With 23+ years of experience as a Senior Lawyer, Strategic Contracting Adviser and Management Consultant in Construction Law, Contracts, Major Projects, Commercial Advisory, Compliance, Procurement, Contract Management and Risk Management, Rachelle has the rare skills to offer you seamless business advice and legal advice to help support your organisation.
As well as a Lawyer and Business Adviser, Rachelle has also acted as a Strategic Procurement Adviser, Compliance Manager, Strategic Risk Adviser and Commercial Manager.Rachelle owns Blaze Business & Legal, a combined Commercial Law Firm and Business Advisory Firm located in Brisbane, Queensland, Australia. Blaze Business & Legal assists a broad range of clients in the Construction Industry and related industries, and advises owners, contractors, subcontractors, NFPs and other organisations on a broad range of Construction Law, Commercial Law, Business Advisory and Management Consulting issues in Brisbane, Queensland and around Australia. Rachelle also owns Blaze Professional Learning, where she offers practical contracting skills, hands-on experience in drafting and working with contracts, and industry insights to help Professionals upskill and advance their careers with real-world skills.
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