When most people think about funding a startup, their minds jump to venture capital funds and other investor opportunities. However, there is another method that has recently risen in popularity: crowdfunding. Rather than getting one or two large loans from prominent investors, crowdfunding allows entrepreneurs to gather the money they need in smaller amounts, sometimes from investors but often from individual consumers. This is often done through platforms such as Kickstarter or GoFundMe, and typically offers some kind of reward for investors. Does it work, though? Let’s explore this unique method of raising funds for a startup business.
Types of Crowdfunding
First of all, it’s important to note that there are multiple types of crowdfunding. Most people are familiar with donation crowdfunding, which is the kind of campaign seen on platforms like Kickstarter. In these campaigns, entrepreneurs can advertise their product, set a fundraising goal, and then collect donations from interested buyers. More significant donations might earn exclusive prizes or rewards, while smaller donations might just guarantee access to the product’s first launch. This tiered reward system incentivizes donors to donate more to access better products.
However, there are two other primary crowdfunding strategies: debt crowdfunding and equity crowdfunding. Both of these typically target investors rather than typical consumers. In debt crowdfunding, the investors are promised a return of the donated funds with an agreed-upon level of interest. In equity crowdfunding, investors donate in exchange for a certain amount of equity in the startup.
Builds Support Network
One of the great benefits of utilizing crowdfunding to launch your startup is that it builds an enthusiastic network of supporters early on, often before the product is ever launched. This can ensure long-term support and help you spread the word about your product quickly. Early backers are typically very invested in seeing the advertised product come to life and will continue to be supporters well into the future if the business succeeds.
One example of this is the viral card game, Exploding Kittens, which became the most-backed project ever on Kickstarter. Backed by an extensive network of supporters, they have released many other successful games that fans continue to enjoy and share with their own networks.
Doesn’t Guarantee Success
The challenge with crowdfunding, however, is that there is no guarantee of success. Even great product ideas don’t always get the funding necessary, and founders can lose a lot of time, energy, and even money if the campaign falls short. Crowdfunding can work, but only for certain kinds of startups. It’s essential to do extensive market research and test the waters among consumers to see if there’s enough interest to launch an entire campaign.