How does crowdfunding work? It's simple to raise funds online for your business. You set up a profile and pitch on one of the sites. You get folks interested in investing by giving them some sort of reward in exchange. The bigger the investment, the better the reward.
If you are selling a product or service, you might offer them whatever you are selling. For small investments, you might offer some swag. Investors register on the site, and the site will collect money from them on your behalf. (And let's face it, entrepreneurship is hot. Even colleges are teaching courses on it.)
Some sites allow you to choose between rewards and issuing equity, with an ownership interest. A quick search will bring up dozens of sites to help you raise funds, some of which are very specialized. I found one strictly for app developers! Just like some jobs hit your sweet spot, some platforms may be a better fit, too. Here are some of the most popular ones, along with their key attributes and costs.
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KickStarter is one of the better-known sites used to raise funds for your creative endeavors in return for rewards.
It launched in 2009. At the time of writing this, 110,575 projects successfully launched since then, with $2.5 billion pledged from 11 million people representing every continent.
KickStarter is a benefit corporation. This means that its (legal) mission is to have a positive impact on society. It is still a profit-seeking enterprise, though.
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You set the goal, and if it isn’t reached, you don’t get anything.
If you reach or exceed the goal, KickStarter keeps five percent, plus between three and five percent to process the payments. About 50 percent of projects on KickStarter have been successful. Backers register on the site with payment information. If the project reaches or exceeds its goal, their credit card is charged, and their reward is sent.
Successful Kickstarter Campaigns you may recognize:
- Cards against Humanity
- Spike Lee (“The Newest Hottest Spike Lee Joint”)
- Carla Hall’s Southern Kitchen (restaurant)
- Tom Rush (“Tom Rush’s Grand Finale to His 50th Year on Stage”)
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IndieGoGo, meanwhile, offers a bit more than just crowdfunding.
They offer support services up-front and a post-launch marketplace for products. IndieGoGo can be used for social causes as well as commercial ventures. Folks raising funds for social causes and non-profits may qualify for fee-free fundraising on IndieGoGo through their “Generosity” arm (although they still have to pay for payment processing).
IndieGoGo gives you the option of either taking whatever you raise or going the all-or-nothing approach of KickStarter.
Pricing for the all-or-nothing is about the same: five percent to IndieGoGo, and three percent plus 30 cents per transaction to process payments. The flexible option will cost you nine percent. But you get a rebate if you reach your goal to make it about the same as the all-or-nothing option.
IndieGoGo has helped over 650,000 projects to raise $950 million from 11 million people.
Backers can use PayPal or credit cards. Funds can be raised in a few currencies other than U.S. dollars (Euros, Canadian dollars, British pounds, and Australian dollars).
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RocketHub is another site that helps you raise equity in exchange for goods or services.
They offer a tutorial program to help you bring up to speed on building your campaign. RocketHub charges a four percent fee, plus four percent processing if you make your goal – or, alternatively, eight percent and four percent if you don’t. They raise funds in U.S. dollars and accept credit cards. RocketHub hosts fundraising for arts, science, business and social good entities.
With Fundable, you can issue traditional equity or equity with rewards (typically when raising less than $50,000).
Rather than work on a percentage basis, they charge $179 per month to be listed on their site. They have a network of accredited investors (angels) ready to consider projects on the site.
Actual equity investments take place outside of their site. Fundable just plays a matchmaker role. Investments for projects that give backers rewards clear through the Fundable site for 3.5 percent and $0.30 per transaction. They use the all-or-nothing model. Over 23,000 investors have funded 677,000 start-ups on the site. A quick look at recent successful fundraising shows that most projects have raised over $1,000,000.
Fundera claims that they are a single stop for all types of business loans. Their lenders have a variety of loan products. You only need to fill out one application, and lenders will make you competitive offers. This costs you nothing — the lender will pay Fundera from two to five percent of the loan amount once the funding comes to you.
Fundera also provides some services to you post-funding. If your business is not yet up and running and generating revenue, your options will be limited to business credit cards and personal loans, all based on your personal credit history.
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The Bottom Line
There are many factors to consider when deciding on raising funds for your business. In addition to selecting a site that is a good fit for your company, make sure that the effort involved in the fundraising exercise fits into your overall business plan. The last thing you want is to raise money without a solid strategy.