Crowdfunding goes beyond helping new ideas come to life. Certainly, many of the innovative inventions, technologies, art projects and businesses that have been funded on popular crowdfunding websites would have been deemed too risky for traditional funding methods. The need for a nontraditional source of funding for such projects is strong, and crowdfunding has filled this gap in recent years.
While crowdfunding has also been utilized for B2B commerce and for marketing existing businesses and products, a recent survey shows that only two percent of business owners have used a crowdfunding platform. One of the most common reasons for not using crowdfunding is a lack of understanding about how it works.1
What Exactly Is Crowdfunding?
Traditionally, crowdfunding is the concept of raising relatively small amounts of money from a large group of people. However, it’s also been used by businesses to combine orders in order to cut costs with suppliers and improve efficiency.
There are four distinct types: reward, donation, equity and lending.2 Each type has its own different set of risks and benefits for campaigns and their backers.
Today, the most common form of crowdfunding is rewards-based. These campaigns set various levels of rewards incentivizing backers to donate more money. For example, for a $10 donation a business may choose to include a backer’s name on the list of donors on its website. If a backer chooses to donate $100, they’ll be among the first people try out a new product. If they want to donate $1,000, they may receive a personal tour of the factory. It’s all up to the creator.
Backers funding donation campaigns don’t seek anything in return. Though businesses can use this type of crowdfunding, it’s much more common for individuals with an immediate, personal need, or charities supporting worthy causes.
Equity crowdfunding allows backers to take an equity stake in a business. Only about 6 percent of crowdfunding is in this form, and it has been one of the slowest to develop because of the legal uncertainty surrounding it.3 Soliciting equity investments implicates securities laws, and until recently the rules surrounding this form of crowdfunding have been uncertain.
In late 2015, the Securities and Exchange Commission adopted rules to permit companies to offer and sell securities through crowdfunding.4 The rules provide limits on the amount of money an issuer can raise, disclosure requirements, and the regulatory framework for crowdfunding websites and portals.
Looking to the future, equity crowdfunding may represent the next frontier in crowdfunding. Equity investments that in the past may have been available only to a select group of investors, like accredited investors, venture capitalist and private equity firms, will now be open for funding by a wider group of people. As the regulatory framework in this area continues to develop, investors will have protections, and companies will be empowered with the means to innovatively raise funds for new projects.
Unlike the forms discussed above, money raised through lending crowdfunding is paid back in a set amount of time, with interest. This area has recently seen large Initial Public Offerings (IPO) and can provide investors with the opportunity to make money on a wide array of loans. Additionally, many lending crowdfunding platforms also serve as currency transfer platforms, so that lenders can execute foreign exchange when lending their currency to a recipient in a foreign country.
How Crowdfunding Can Help Businesses
Projects are started for a variety of reasons other than raising money. Crowdfunding is regularly cited as a way of getting direct feedback from the public about how to improve a new or existing idea.5 This can save a business tens of thousands of dollars by testing for public demand before rolling out a product and providing a proof-of-concept.
Businesses also sometimes utilize a crowdfunding campaign as a marketing tool. Occasionally, crowdfunding campaigns go viral and are rapidly shared on social media outlets by millions of users. While there are some characteristics commonly shared by viral campaigns, like the fact that many feature a tabletop game or physical product, the phenomena is generally unpredictable.6 Carefully crafted campaigns featuring celebrities and expensively produced videos can flop while shockingly simple concepts become overnight sensations.
After the Campaign
The benefits of a successfully funded campaign extend past the campaign’s formal end date. With a successful campaign comes a sense of market approval that enables new ventures to seek additional funding after the initial crowdfunding campaign. Additionally, the sense of community built by passionate backers from the beginning of the campaign remains as the funded enterprise grows.
The opportunity to take advantage of international crowdfunding is still being developed, but even now there are promising opportunities. There may always be a use for crowdfunding in a business. Crowdfunding campaigns have been utilized to provide marketing, proof-of-concept for new ideas, feedback from the public and even cut costs when dealing with a supplier.