Most Popular Types of Crowdfunding For Startups: Which One Is Best For You

Posted by Elisabetta Ferri on Jan 25, 2021 08:08: AM
Elisabetta Ferri

Crowdfunding is one of the most reliable ways to get funding for your startup. It provides excellent potential and can even help in growing business. However, one key thing to consider is knowing which types are best suited for your business.

Crowdfunding is defined as a kind of practice where you gather small amounts of capital from a large group of people all investing into your business or endeavour. If you have a project that you think will appeal to not only friends and family, but also a vast group of strangers, it may be worth checking to see if crowdfunding is something you can utilize. Essentially, If you want your company to thrive, crowdfunding is a fantastic funding method to consider.

Which Is Right For You

 

Once you’ve decided that crowdfunding may be what you need to start your own business, take the time to figure out which kind of crowdfunding is the best for you. You can look to choose from several types and see where you’ll excel at the most. Having the right kind of crowdfunding could even potentially make or break your startup.

Here are the various types of crowdfunding for a startup that they can take advantage to consider

 

Equity-based crowdfunding

By definition, equity-based crowdfunding is a kind of crowdfunding where you raise capital from other people by selling securities such as shares, debt, and revenue share. This is usually used by smaller private companies that do not list themselves yet on the stock exchange. This could be useful to you if you look to start a kind of corporate business.

One of the many benefits of equity crowdfunding is that, for investors, they obtain shares in the company. And as the company progresses and continues to grow, so too will their returns and investment. This kind of crowdfunding is easily accessible to investors, so finding a few won’t be too difficult.

Unfortunately, there are some risks involved when it comes to equity-based support. One of them includes a greater chance of failure and loss. Investors could potentially lose all of their money if the company fails to get off the ground. Although many usually know the danger, it doesn’t help anyone if your venture doesn’t go anywhere at all.

Debt-based crowdfunding

Debt-based crowdfunding has some similarities to taking out a loan for your startup. You ask for a more considerable amount of money from investors to fund your venture. Once you’ve raised enough capital over time, you return the loaned money with interest within a certain amount of time.

One of the key differences between this and taking out a loan is that the interest rates for this are usually much lower. You could find funding relatively quickly and start your business sooner compared to the other forms of crowdfunding. As long as you can generate income within the agreed time you’ve made with investors, you’ll be able to find success in your industry.

The main concern you will probably have this kind of funding is the actual debt. If the company does not do well enough, you will struggle to pay back the loan. This could lead to investors discouraging others from providing you with the support you need in the future.

Donation-based crowdfunding

If you’re looking to find support from people who want to get something immediately in return such as small tokens or rewards, donation-based crowdfunding might be a good fit for you. It essentially allows you to accept small amounts of money from a crowd, giving them rewards

The rewards themselves increase in value or prestige depending on the part of the donation.

This kind of crowdfunding easily appeals to funders, as they can expect something in return within a short amount of time. This will get you the funding you need. You can even encourage people to donate higher amounts as long as you provide token rewards of increasing significance while still owning everything you’re working on.

A big downside to this is thinking of an appealing enough reward that will entice funders to give you money in the first place. If investors don’t see any worth in any of the rewards you’re offering, they’re more likely to pass and ignore your crowdfunding. Therefore, it’s essential that you have some valuable set of rewards that people want and something they can’t get anywhere else.

Rewards-based crowdfunding

A rewards-based crowdfunding may have some similarities with donation-based crowdfunding, but a pivotal aspect to one based on rewards is the tiers available to investors willing to give their money to your business. For example, if an individual pledges and gives you a small amount of money, you could provide them with a copy of the product upon its release. But if another person pledges and offers a more considerable amount of money in a higher tier, you could have his name especially mentioned within the product. The higher the tier, the more significant the contribution of the funder.

The appeal of this is similar to donation-based crowdfunding. However, the rewards are more defined. It would encourage investors to spend more money in hopes of having a more significant part in your venture.

There’s added pressure when it comes to providing a satisfactory product funded by rewards-based crowdfunding. Because investors’ names are going to be tied to the product, you must ensure that it is something that they will be happy with. Failure to do so could lead to a ruined image and discourage the crowd from supporting any other product you may want to take down the line.

Royalty-based crowdfunding

This kind of crowdfunding will have backers expecting a smaller percentage of the revenue gained from the venture once it’s successful enough to achieve it. This is usually used by startups creating phone applications. The more money the product or service generates, the more returns investors will get overtime.

Royalty-based crowdfunding usually asks for a large amount of money as support. This in itself could be all that you need to get started and finish any product you’re working on. Once it’s finished, you can work on generating revenue to give back to your investors.

The main risk here is that investors will be expecting money in return for their investment. Therefore, the returns they’re receiving must seem more than the money they had lost in their investment. And as previously mentioned, this kind of crowdfunding asks for large amounts of money, so that alone may turn them away, making it difficult for you to get the financial support you need.

Summary

Take your time to do research and due diligence in finding out which one the best kind of crowdfunding best fits your startup. Optimization is critical, and that alone could be all you need in launching a successful crowdfunding campaign. Match your product or service to the type of crowdfunding you’ll be using, and soon enough, you’ll have everything you’ll need.

If you are searching for funding for your business, Trendscout is an excellent crowdfunding platform that can help you.

Trendscout is a platform based in the heart of London, linking angel investors and entrepreneurs, specializing in the development of purposeful, considered collaborations that drive profit and growth.

Hundreds of startups are reviewed by our team of experts every year. We evaluate the potential, mission and ethical practices of every business we work with, ensuring that every startup we represent aligns with our values.

With over 30 years of business and expertise, our network of creative startups and founders helps us to identify up-and-coming opportunities before they hit the masses.

If you're interested in investing in crowdfunding, you can make an appointment with us today. Rest assured that someone will assist you every step of the way.