Typically, historically, there have been two ways to fund a project or business – debt financing and equity financing. Debt financing is as it sounds – you take out a loan and agree to pay it back over time. Equity financing, as you likely also know, is where you sell a piece of the business in exchange for cash, usually to an angel investor or venture capitalist (VC).
But, just as it has changed everything else it has touched, the Internet has changed business funding as well. We can now add to the old ways of financing a business a new way, and in many ways a better way: crowdfunding.
You may have heard of the term as it is a pretty hot idea these days. With crowdfunding, an individual has a business or project that needs a certain amount of capital to move forward. That is the same as other types of funding. The entrepreneur looks for people willing to take a chance on this vision. That too is the same. But here’s the kicker: Instead of getting repaid with cash, the crowdfunding investor accepts some other type of “reward” as payment, in lieu of money or equity.
What sort of reward, you ask? Something to do with the business or project. A filmmaker looking for financing for his movie might offer a credit at the end in exchange for an investment of, say, $100. A restaurant may name a sandwich after a crowdfunding investor.
Here’s an example: TikTok + LunaTik are products that take a small iPod Nano and turn it into a unique wristwatch. The designer offered the following rewards on the crowdfunding site KickStarter: “A pledge of $1 or more helps make this project a reality. For $25 or more you are pre-ordering and will receive the TikTok Multi-Touch Watch Kit, which will sell for $34.95 at retail. For a $50 pledge you are pre-ordering and will receive the LunaTik Multitouch Watch Conversion Kit. The LunaTik is hot-stamped and [made] out of aerospace grade aluminum. $150 or more gets you a serialized, red-anodized LunaTik KickStarter Backer Edition signed via laser by the designer.”
The initial goal was to raise $15,000. The product proved so popular though that 13,512 people invested $941,718. Amazing, eh?
There are more and more crowdfunding sites popping up online these days, so a Google search will help you find the right one for your project, but here are two main ones to help you get started:
Kickstarter is one of the better-known names in the crowdfunding game. KickStarter offers a number of different categories like Food, Art, and Technology. While listing a project is free, KickStarter retains 5% of all money raised, as well as a small portion of all credit card processing fees.
One of the unique things about KickStarter is that projects must raise 100% of their goal, or they get nothing. If a business only raises 25% of its goal, it does not get to keep the money. This protects investors and gives them the confidence necessary to invest.
IndieGoGo does not require 100% funding to move forward, but if you do not raise the full amount, they charge you more: 9% as opposed to 4% if you get fully funded. This idea otherwise is the same:
- You create, customize, and publish an online funding campaign
- You raise awareness of it by sharing it with others on the site and elsewhere
- You collect contributions, and
- Track contributions using the site’s dashboard
So if you are looking for funding for your next big idea, crowdfunding is definitely something that should be part of the mix.