In the past, when someone wanted to fund something — be it a project, a company, or anything that required capital to start — there were a few different ways to raise money. They could take on debt from a loan. They could raise money from friends, family, angel and venture capital investors. They could even take the “bootstrap” route and scrounge up as much money as possible to fund everything themselves without owing anyone anything.
In the late ‘00s, a fourth option became viable for those trying to get something off the ground: the power of crowdfunding.
Crowdfunding is a way to raise money from a large number of people. With this method, a large group of people pool together small individual investments to provide the capital and funding needed to get a company or project off the ground. Individuals, charities, and companies can create a campaign for specific causes or companies, and anyone can contribute.
Types of crowdfunding
- Equity-based crowdfunding provides opportunities for people to invest in startups. Investors can receive the promise of stock or future shares in a company in exchange for capital when backing this type of campaign. For the purposes of this article, we’ll primarily discuss this type of crowdfunding. Yet there are many different types of crowdfunding, including:
- Donation-based crowdfunding is when someone donates to a specific cause or charity (think GoFundMe).
- Reward-based crowdfunding is exactly how it sounds; people donate to unlock a specific reward linked to the project they support, like when one funds a new product line to get that product.
- Peer-to-peer lending allows individuals to obtain loans directly from other individuals without a bank or other financial institution acting as a middleman. Think of this as debt crowdfunding.
- Real estate crowdfunding offers individuals opportunities to invest in real estate projects. This is especially useful for people looking to invest in real estate, but who don’t want to deal with mortgage brokers, real estate agents, or contractors.
- Human capital crowdfunding is a way for people to raise money to back their personal growth or projects. For some, this is an alternative to student loans or an opportunity to fund a project in exchange for a share of the winnings. For instance, many poker players crowdfund money to play, and then distribute a share or their winnings back to investors.
The benefits of crowdfunding
There are many benefits to crowdfunding, beyond raising money.
Getting access to capital is hard for most new ventures. Many early stage companies are passed over by VCs for a variety of reasons, and getting money from banks or rich family members are hardly sound strategies. Crowdfunding, however, levels the playing field for everyone, lessening the reliance on once-traditional fundraising methods.
Crowdfunding is also a great opportunity to prove a concept and gain traction for future fundraising. It can provide the runway needed to build both the necessary funds and to prove interest in a product. This allows companies to draw interest from new users or fans and keep existing ones engaged.
Crowdfunding also involves a campaign goal and timeline, which creates a sense of urgency to motivate investors. It’s a great way to build a sense of FOMO (fear of missing out) and to attract early support.
Since one must engage the crowd to be successful, campaigns provide an incredible platform to raise awareness for a company, brand, product or service. Crowdfunding creates an opportunity to build buzz and to secure early adopters. Crowdfunding also allows people to fund projects they genuinely believe in and care about; it’s a great way to connect with potential customers and get them to be both investors and ambassadors for a brand.
Crowdfunding allows investors to invest small amounts in multiple ventures, thereby diversifying one’s portfolio and maximizing the chances of a big payout. All an investor really needs is one blockbuster investment and their return could be huge.
The risks of crowdfunding
From a company’s perspective, crowdfunding can be a great way to raise funds — and fast. While it requires a lot of work, promotion, and attention to have a successful crowdfunding campaign, over 90% of startups on Republic alone raised successfully. Though success is never guaranteed and there’s always a chance campaigns won’t raise the minimum desired capital, platforms like Republic use every available resource to bring more awareness to each campaign.
From an investor’s standpoint, just like other forms of investing, there are always risks.
For one, investors could lose their entire investment. Just because a company meets its crowdfunding campaign goal, doesn’t mean that company is bound to succeed. In fact, most startups fail, and in the long run, if that business that does not succeed, an investor will likely lose all the money invested. Even if a company does succeed, it may take years for any returns to materialize.
As with anything on the Internet, there’s always a risks associated with crowdfunding campaigns. Investors need to be sure to vet any funding project to make sure their funds will be used appropriately and towards a credible company or cause. (Republic helps mitigate this risk by doing a thorough background check on all companies who raise on our platform.)
It is worth mentioning that, with the expansion of the private investing market, startup investing platforms like Republic have internal teams dedicated to lessening risks associated with the private market. Though these companies are nowhere near as tightly regulated and scrutinized as public companies, fraud prevention and other safeguards are put into place to insure investors get what they’re paying for with the most relevant information available.
What is crowdfunding for companies?
Like other organizations, businesses can use crowdfunding to raise capital for their venture. When we define crowdfunding in business, we mostly think about startups, angel investments, and transactions outside of the traditional financial institutions. Put simply, crowdfunding for business presents a great opportunity for startups to source a large group of investors efficiently.
How does crowdfunding work for companies?
With crowdfunding, platforms like Republic made it easy for people (or backers, as they’re often called) to invest with just a few clicks. Typically, crowdfunding campaigns have a set goal and offer incentives or rewards to those who invest. If the goal is met, the backers usually benefit from supporting that campaign. If the company has an exit event in the future, like an acquisition or initial public offering, backers can earn cash or stock.
How is crowdfunding different?
In crowdfunding, numerous investors are invited to participate and contribute their share of the pie. This is a dramatic step away from more traditional fundraising, where companies and institutions seek capital from one or a few major investors. Crowdfunding is also primarily done online, whereas other forms of financing mostly occur offline.
Tips for crowdfunding success
How can one make the most of the next crowdfunding opportunity?
- The goal — Know what funds will be used towards by the person or company hosting the campaign.
- The team — Maximize the chance that this company will succeed. Researching the founders, advisors, and team history is a great way to determine if the founder has the right people on board to execute their vision — or if they’re setting themselves up for failure in the future.
- The UVP (unique value proposition) — Make sure to watch for companies that are using technology in a new or unique way, or that could potentially disrupt an existing market. Try to identify their UVP, see what makes them special, and make sure they are bringing a clear and unique solution to market.
- Research the market and traction — A product or service is only good if there’s interest from potential consumers. Research the market they are hoping to address. Is there a need for their product or room for growth? One can also look up that company’s traction for data on how their concept is performing in initial markets.
- Fraud — Always check the company website, filing, and other paperwork to make sure they are truly credible. Don’t just click on the next opportunity that appears on social media.
Examples of successful crowdfunding campaigns
When Zach Brown wanted to try his hands at crowdfunding, he started with a simple, yet ambitious goal: to raise $3,000 for the purpose of "renting out a party hall and inviting the whole internet to the potato salad party." This captured the internet’s attention and over 7,000 people came forward to contribute to the campaign. In the end, the potato salad raised $55,492. It proved the power of crowdfunding.
Pebble smartwatch also reached tremendous success when looking for backing from the crowd. The goal was to raise enough capital funds to launch its Pebble 2 and Time 2 watches. Driven by customer fans-turned-funders, Pebble raised over $1 Million in just one hour on Kickstarter. It since continued to raise funds and is ranked as one of the top earning campaigns in Kickstarer history.
Sapient was looking to raise a late seed-stage round. By launching a campaign on Republic, Sapient not only raised $1,070,000 from 1889 investors, they also gained 20+ customer leads and $750,000+ in customer contracts just from their campaign. This gained them further exposure with angel investors like Jason Calacanis, as well as with consumers.
These example campaigns provided a clear goal and outcome with their campaign. They spoke to their backers’ interests and demonstrated how with each investment, they will get closer to unlocking a product, service, or reward for the community. Crowdfunding gives people an incredible opportunity to support projects they believe in and products they want to purchase. If that company reaches its goal or finds success, everyone benefits.
How to start crowdfunding on Republic
Republic makes it easy for companies to raise through crowdfunding. We do thorough background checks and vetting to ensure that all companies raising on our crowdfunding platform are credible. We’re home to a diverse community of angel investors, including some of today’s top VCs, and connect them directly to new funding opportunities.
If you know someone with a startup or early-stage company looking to raise funds for their company, you can refer them to Republic today. Our team will set up a time to talk about their venture and see if crowdfunding is right for their company.