Crowdfunding – Everything You Need to Know
When you’re starting a new business or making big plans to expand an existing one, how to raise money is usually one of the first questions that come to mind. Depending on what kind of business you want to start, it’s possible that you will need more money than you have available to you. That’s where finding funding becomes important. While traditional funding sources such as bank loans are an option for funding your business, you might also want to consider using crowdfunding platforms to make your vision a reality. Luckily, there are many options for how to go about crowdfunding in Canada.
What is crowdfunding? Crowdfunding definition.
Just like the name suggests, crowdfunding refers to seeking funding from a large group rather than one institution or individual. This way, the total amount of funds you are trying to raise will be diffused across many funders, making it easier for those who support your business to contribute. This can be a great way to get the startup funding you need while avoiding some of the challenges associated with traditional funding.
Since crowdfunding typically entails some sort of campaign, it can also be an effective way to create buzz around your business in a way that simply obtaining a bank loan or applying for a grant doesn’t. There are quite a few crowdfunding websites you can choose from when crowdfunding in Canada, and which one you choose will depend on the specifics of your project. So, what’s the best way to choose a fundraising website?
Understanding different crowdfunding models
Before you choose a crowdfunding site, it will help to understand the different models available. This will help you narrow down your list when deciding which platform is best for your business.
The rewards crowdfunding model
The rewards model is the one you might already be most familiar with since it’s quite popular, and you may have seen these campaigns shared on your social media feeds before. With this model, you offer different rewards for different levels of funding. Often, the funding can serve as a pre-order for a new product, and the reward is the product itself once it has been manufactured.
If you don’t make a physical product, your reward can also be something like a certain number of hours of your service. With this model, you can also create more valuable rewards for higher funding contributions, encouraging your funders to contribute more.
The donation crowdfunding model
Another way to go about crowdfunding in Canada is with the donation model. Since your funders don’t receive anything in return for their contribution, this model likely won’t work for most businesses. People typically want something in return for their money, but the exception to this rule is if you are starting or expanding a charitable or non-profit organization.
Since small charities and non-profit organizations often operate on a tight budget, people don’t typically expect something in return for their contributions as long as they know their money is being spent wisely and contributing to the stated cause. If this is the type of organization you are starting, you may want to consider the donation crowdfunding model.
The equity or lending model
The third model for crowdfunding platforms is the equity or lending model. With this option, funders receive either a portion of future revenue or shares in the company itself. This is quite a lot to give up, and many entrepreneurs won’t be comfortable giving away a portion of their future sales or partial ownership of their company. However, there are some situations where this is a great way to raise money.
For example, if your business is established and doing well, but you require a large amount of capital for the next growth stage of your business plan to do things like hire employees, this could be the way to go. If you’re a small newly registered sole-proprietor, the rewards model might be a better choice.
What sites should I use for crowdfunding in Canada?
Over the past few years, many new crowdfunding websites have appeared offering alternatives to the big-name platforms such as Kickstarter. While big platforms have their perks, it can also be difficult to get noticed when there are so many different campaigns competing with yours on the website. Familiarizing yourself with the various sites available now can help you make the best choice for your crowdfunding campaign.
Equity/lending model fundraising websites
Canadian crowdfunding platform FrontFundr specializes in connecting investors with early-stage companies, providing an alternative to venture capital firms and angel investors. Since investors can invest as little as several hundred dollars in a new firm, they don’t have to take on a lot of risk, but you can still raise a large sum for your business.
Since there aren’t too many campaigns running on FrontFundr at any given time, your campaign won’t get lost in a sea of projects.
Another option to consider is Vested, where investors can contribute as little as $100.
Equity crowdfunding portals operating in Ontario must be registered with the Ontario Securities Commission, and you can check Are They Registered to confirm that you are partnering with a registered portal. If you are in a different province, check to see if there is a provincial securities commission you can contact for your region.
Reward or donation model fundraising websites
Kickstarter is probably the most well-known reward model crowdfunding website, and it can be used for crowdfunding in Canada. It is a trusted platform with the potential to get in front of many people, but the fact that it is so popular means it might be difficult to get noticed.
Fundrazr is another portal to consider. This Vancouver-based crowdfunding platform has been gaining popularity, and many businesses have successfully fundraised their full goal using it. Fundrazr’s platform easily connects to your network on Facebook, Messenger, WhatsApp or wherever they may be, making it easy to share your campaign widely with your target audience.
Important considerations before crowdfunding
When planning your crowdfunding campaign, check if the platform you’re using has a keep-it-all model or an all-or-nothing model. A keep-it-all model refers to campaigns that allow you to keep any money that you raise, even if it falls short of your crowdfunding goal. All-or-nothing models require that you raise the full goal amount to be able to collect it.
A keep-it-all model means that you’ll conclude your campaign with some startup funding, even if it’s not the full desired amount, but it’s worth considering that an all-or-nothing model can create a level of buzz and urgency that can actually help your campaign. It can be an effective way to market your business on a budget.
If you cannot start your business or go forward with your planned expansion without the full amount, it may be worth opting for an all-or-nothing campaign to increase your chances of reaching your goal.
Another thing to consider before starting your campaign is your ability to share it widely. If you simply rely on your crowdfunding site to bring traffic to your campaign, you may be disappointed. Plan your social media outreach in advance so that you can make sure you’re doing everything you can to get the word out before and during your campaign.
If you are considering equity/lending crowdfunding in Canada, you will also have to make a considerable amount of information about your company’s financials public. If you aren’t comfortable doing this or don’t think it is good for your business in the long run, this is something to consider carefully before committing to a campaign.
The flip side of this is that crowdfunding allows you to see what competitors in your niche are doing, which can be an excellent source of market research!
Whether you’re starting a brand new business or exploring ways to grow your existing enterprise, crowdfunding has become a serious way to raise capital and awareness about your product or company. A well thought out and carefully executed crowdfunding campaign can get you the startup funding you need without dealing with some of the barriers common to traditional fundraising methods.