Crowdfunding has become a very popular way to raise money among startups. In 2017, 17.2B was raised via crowdfunding campaigns in the U.S. alone. Business.org lists best crowdfunding sites with detailed comparative statistics and is a great resource for beginners.
In this article and corresponding video, we discuss two types of crowdfunding, how to choose which type is the best fit for your venture and which factors you need to consider in each case.
With this method, you use a platform as an intermediary to get access to a pool of professional investors.
There are two main considerations with equity crowdfunding:
# 1: Regulation
All equity raised via crowdfunding sites are subject to the corresponding SEC rules and regulations.As a startup founder, you must make sure you meet all such requirements and that you use a reputable SEC-registered platform to obtain financing.
# 2 Fees
There are typically two types of fees you may incur: % of funds raised and % equity. Seedinvest charges both.
Generally speaking, this method of startup financing is quite expensive because of the fees involved and should only be used by those startups who cannot find investors directly.
Further, the average amount of money you can raise is $280K from an average of 300 investors, and thus this method of financing should only be considered for your first round.
Rewards/ Donations Crowdfunding
With this method, you either offer rewards or recognition if it is a donation. The two main platforms are Kickstarter and Indiegogo. Your investors in this case are not professional investors, but rather enthusiasts whose main motivation is to support your mission and/or your product offering. That is why this method of crowdfunding is most suitable for consumer products, social causes and creative projects.
There are two things to keep in mind if you decide to pursue this form of financing as opposed to equity crowdfunding.
# 1: Amount of money
The amount of money you can raise here is much smaller than what you can raise via equity crowdfunding. The average investment varies from $7K to $20K depending on a source.
# 2 Access to funds
Some crowdfunding platforms, such as Kickstarter, will not give you access to funds unless you reach a stated goal.
Finally, just like with equity crowdfunding platforms, these platforms charge a fee, but only as a percentage of funds raised.
To learn more about traditional forms of startup financing, please take Course # 5.
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