Crowdfunding is an increasingly popular way for startups to raise money.
When crowdfunding, you basically tap into a large pool of people who contribute small amounts.
It can help you build a community of early supporters and validate your idea in the market.
There are several types of crowdfunding. Let’s explore them further.
Rewards-Based Crowdfunding
In rewards-based crowdfunding, backers provide small business loans in exchange for non-financial rewards.
These rewards can be anything from early access to the product, special editions, or exclusive experiences.
This type of crowdfunding is ideal for startups launching a new product or service that appeals to a broad consumer base.
Kickstarter and Indiegogo are the perfect examples of popular rewards-based crowdfunding platforms.
Benefits of rewards-based startup funding:
- It helps you gauge interest in your product before you fully launch.
- You’re not giving up any ownership in the company.
- Crowdfunding campaigns can generate buzz and attract media attention.
Equity Crowdfunding
With equity crowdfunding, backers contribute money in exchange for equity or shares in the company.
Unlike rewards-based crowdfunding, investors become partial owners of the startup and share in its potential success (or risk).
Government bodies regulate this type of crowdfunding and often involve accredited investors, though some platforms allow the general public to participate.
SeedInvest, Crowdcube, and Wefunder are popular examples of equity crowdfunding platforms.
These allow companies to raise money from a large pool of investors in exchange for equity.
Some perks of equity startup funding include:
- Larger investments compared to rewards-based crowdfunding.
- Long-term support, as investors are often more invested in your success since they have equity in your company.
- Access to a large pool of investors since many platforms allow non-accredited investors to participate.
Debt Crowdfunding (Peer-to-Peer Lending)
Debt crowdfunding, also known as peer-to-peer (P2P) lending, allows businesses to borrow money from a large group of individual lenders.
You don’t give up ownership, like in equity crowdfunding, but you must repay the loans with interest.
This option is suitable for startups that want to avoid equity dilution but need capital for growth or operations.
Funding Circle, LendingClub, and Kiva are the top debt crowdfunding platforms out there.
There are several benefits of debt startup funding:
- You retain full ownership of your company.
- Compared to a traditional business loan, P2P lending often offers lower interest rates.
- Once approved, you can access the funds more quickly than with equity crowdfunding.
Donation-Based Crowdfunding
In donation-based crowdfunding, backers contribute money with no expectation of financial return or rewards.
This type of crowdfunding is often used for charitable causes, social enterprises, or community-driven projects.
GoFundMe and Patreon are the most well-known donation-based platforms.
Benefits of donation-based startup funding option:
- You don’t have to give up ownership or repay any of the funds.
- Donation-based crowdfunding helps build a community of supporters around your mission or cause.
However, keep in mind that donation-based crowdfunding is typically used for nonprofit or social impact initiatives rather than profit-driven businesses.
It may be difficult to raise large amounts of money through donations alone.
If you are feeling overwhelmed about all these types of funding, feel free to explore our guide on the psychological aspects of fundraising.