By Fernando Berrocal
There is a spectrum of crowdfunding options available to startups in 2022. Some small businesses employ equity or investment crowdfunding, while others benefit from crowdfunding in its rewards-based or donation-based forms. All types are generally enabled through specific platforms. These applications connect investors and donors–while showcasing entrepreneurs and fundraisers. It is a decidedly modern practice with a growing impact; specifically through changing the landscape for small businesses. In this article, we will look at the potential upsides of crowdfunding for startups.
The essence of crowdfunding is small amounts of capital from a large number of people. The resulting money becomes a startup fund. The pandemic created myriad issues for businesses around the world–there is still high demand for non-governmental financing options. While Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) helped many groups, these programs can only do so much–and in specific circumstances. As the pandemic comes to a close, pursuit of capital remains difficult for smaller enterprises. Thus, crowdfunding has cemented its place in the startup world as a viable form of capital.
Crowdfunding can take many forms. There is reward-based crowdfunding such as Kickstarter, a global crowdfunding platform focused on creativity. Donation-based crowdfunding, on the other hand, allows people to raise money for real events, ranging from altruistic ventures to personal challenges. GoFundMe is the most well-known platform for this type of crowdfunding. Reward-based crowdfunding draws a great amount of media attention; regulation crowdfunding is less publicized, yet serves as a great option for many startups.
Small businesses can take advantage of regulation crowdfunding by essentially allowing the general public to become shareholders. Startups can offer convertible notes, various securities, or equity (among other options.) The SEC regulates professionals who assist with this practice, as well as the platforms that can automate the process. The cap on total funds raised is a little under $1,100,000. Regulation crowdfunding has been gaining popularity since 2020, with projections estimating high engagement well into 2023.
- Customers feel committed: Regulation crowdfunding inspires a consumer-company link that other forms of capital simply do not. Witnessing a startup’s actual growth - and the sentiment that a contributor had a role in that growth - has proved to be a powerful sentiment. Entrepreneurs are finding that consumers wish for the organization to do well on an emotional level independent of their investment.
- It’s Surprisingly Diverse
Regulation crowdfunding is an option for all small businesses, from fledgling professional agencies to emerging entertainment enterprises. Traditional funding sources, such as institutional lenders or venture capital groups, can overlook very small startups. Regulation crowdfunding increases accessibility to capital for non-traditional entrepreneurial teams.
- It has the Potential to be Cost-Effective
After calculating the amount charged by whatever platform was used, a crowdfunding campaign will cost under 7% of the amount raised. Startups pursuing this form of financing will still incur legal, accounting, and/or advertising fees–and have to pay the platform that hosted the campaign. Even after factoring in a profit payout to investors, angel investors or venture capital options end up costing far more.
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