Which Type of Crowdfunding Should You Choose for Your Business?
There exist serious issues such as funding for a new business or exhibiting an innovative idea or project for an artist. Fund requirements generally depend on the nature and type of business. Apart from the various fundraising options, there also exists an option where the general public would like to invest in the idea or project where they believe is unique and creative. To assist such small ventures which are facing a lack of funds to display their creativity and also assisting startups which are building great products, such as robots or electric bikes in the market, such kind of fundraising is known as Crowdfunding.
Crowdfunding is the utilization of a small amount of capital by an enormous number of people/supporters to start up a new venture or business. It’s a young and quickly growing market that transforms how people behave with their money and also changes the ways businesses raise capital. It also enables the urge of gaining accessibility of a large network of investors, through social media and various other online websites. It brings both the investors and entrepreneurs together in one place. Hence, it helps in growing entrepreneurship by extending the investment pool apart from the traditional methods of funding via venture capitalists, banks or any other relative circle.
Different Types of Crowdfunding
Below is a list of different flavors of Crowdfunding. Each comes with its own strengths and benefits to investors and businesses. So, the entrepreneurs must decide which suits best for their crowdfunding campaign and business venture (s).
1. Reward-Based Crowdfunding
As the name suggests, this type of crowdfunding has a reward in return for the investment made. It enables the investors to invest in your venture by consideration of non-financial benefits. The reward handed is a way of showing appreciation to the individuals who participate in pooling capital for the startups. This type of fundraising is commonly used for creative ideas or projects. This funding is directly proportional to the amount of investment made. The greater the investments, the greater the rewards. For example, credits on a record cover, tickets for an event, gifts, coupons, etc.
Reward-Based crowdfunding helps in bringing early customers for your business, but it yet requires startups to create an exemplary product or service for its potential audience.
It is not just an effective way of raising capital for a new product line, but also builds fans on a large scale. The companies also turn to reward crowdfunding as it provides the audience for the product to be tested, just to know if the product/idea is a successful launch or not.
2. Debt – Based Crowdfunding
In this type of crowdfunding, the company owes a certain amount to its supporters who have invested as a debt. Debt Crowdfunding allows the investors to invest in a business, where the investor has a benefit of earning interest on their investment at a certain period. These funds shall come with interest or no interest but are payable to the investors only if the venture(s) generate revenue/profit from the funding campaign.
The finance option provided by this model allows lower borrowing costs than that presented by the banks through loans. The benefit of this method is that it becomes easier to win the support for a campaign, as the supporters are attracted to getting a fair return. The startups need to have a track record of their revenues to gain the utmost benefit through this model, if the funds are raised by this method. Ventures seek this option if they do not want to abandon any equity in their new business.
3 Donation-Based Crowdfunding
In this type of crowdfunding, there is no reward or interest payable to the backers, It is termed as an own form of capital funding if the venture is a non-profit organization. It is primarily designed for charitable institutions or projects, or those who raise funds for social or medical causes, by bringing together the community online to donate for these projects or causes. However, many well-established charitable institutions carry the funding process by this method through their websites, but only an early stage of a growing startup normally utilizes a crowdfunding platform to enable funds for its cause or any other specified causes. Charities and communities look at crowdfunding as a support for relief efforts or causes the venture is taking. For example, there are campaigns for special needs like funding the transport of food and clothing of an affected area, or any other disaster relief charities which are seeking funds for rescue and recovery. The amount of capital raising via this method is generally smaller when compared to seeking funds from credit institutions or banks.
4 Equity-Based Crowdfunding
Equity crowdfunding also termed as investment crowdfunding is a type of crowdfunding, where the ventures have to sell a part of their stake to the outsiders. Through which, entrepreneurs raise capital for their business by selling off a piece of their business as shares to the investors in exchange for capital. Hence, with this process, the investors become the shareholder(s) of the firm. It is a popular way of funding utilized by sole proprietors and small businesses or startups. Equity crowdfunding helps the companies to showcase their project or idea to numerous investors and aims at easier access to capital. It acts as a marketing tool.
By including social media and digital marketing, this model provides a smooth way of direct traffic to the venture (s) Investors over here quickly becomes a group of people in making the venture successful, the firms can look back to their investors for healthy feedback or comments which is useful in the early stage of a startup, and hence raising more than just money for the startup.
5 Royalty-Based Crowdfunding
This type of crowdfunding generally ventures the backer’s support. It provides a percentage of profit to the investors who invest in their ventures from the profit earned by the business, only once after the business starts generating revenues. This does not mean that the backers are shareholders, but they are entitled to get the royalties from the sales made as being a funding agent of this model.
With so many variants of crowdfunding categories available, many numbers of entrepreneurs were successful in raising adequate funds required for their new entrepreneurial creative idea to take off for the next level and also were able to generate considerable revenues out of it. However, the venture is advised to conduct detailed research on which crowdfunding suits best for its campaign to have a successful launch. Every category has a different purpose and advantage to benefit from.
We at Crowd bazaar aim to provide you with a reward-based crowdfunding platform (as mentioned in (i) above). If you have an innovative or creative product or service, we would love to hear from you!.