At one point or another, you probably took part in crowdfunding efforts long before the days of online campaigns. Maybe it was selling chocolate chip cookies at the local bake sale or buying lemonade from an entrepreneurial child on a hot summer’s day.
Crowdfunding refers to the process of raising funds for a particular business, charitable cause, or specific project, like a startup business venture. There are many crowdfunding websites to consider, such as Kickstarter and Indiegogo, that allow you to collect funds from individual donors, but which crowdsourcing platform is best to fund your business?
The benefits of crowdfunding platforms
There are many advantages of using a crowdfunding platform to raise capital. For starters, the platform acts as a virtual piggy bank that holds all of the funds raised, rather than placing the responsibility on one individual to be the keeper of the physical donations.
Here are five benefits to using a crowdfunding platform:
Access to capital
Launching a crowdfunding campaign can be a great way to fund a business venture. By creating a crowdsourcing campaign, entrepreneurs can attract future investors with the promise of delivering the final product. Typically, the entrepreneur can ask for a percentage of the deposit (or donation) upfront, and once capital is raised, all contributors receive the final product.
Crowdfunding campaigns have the potential to be wildly popular on social media. After creating the campaign, share it on your website and social media channels. Chances are people in your network will share the link, and that has the potential to spiral into even more engagement! Most crowdfunding platforms also allow you to add videos or photos to make them more engaging.
Rather than asking for a straight cash donation, crowdfunding allows donators to see exactly where their funds are going and how they are being used. Many crowdfunding campaigns also enable the owner to set a financial goal. As the donations pour in, the progress towards that amount is visibly tracked, which allows potential backers to keep an eye on the status of your project.
Easier than a loan
Applying for a loan means getting pre-approved by a financial institution and possibly being rejected if your business credit isn’t in good standing. Crowdfunding is one of the easiest ways to raise money to support a startup business. The entrepreneur simply selects which platform they’d like to use and sets up the campaign.
It’s free to set up
Perhaps the biggest benefit of all, starting a crowdfunding campaign is totally free! On platforms with no fees, the entrepreneur can only access the funds when the total goal is met. If the total amount of the goal isn’t reached, there are no penalties, and each of the backers has their investment or donation returned to them.
7 things to consider before selecting a crowdfunding platform
Crowdfunding is an excellent way for entrepreneurs to pinpoint their target audience, raise financial capital, generate exposure for their business idea, and eventually execute a business plan.
There are plenty of crowdfunding platforms out there, but deciding which one will best support your business can be tricky. Here are seven things to consider when deciding how to choose the right platform:
1. Unique crowdfunding goals
Before you sign up for a platform, make sure the end goal of your campaign is clear. At this stage, it might be helpful to create a business plan or strategy. Not all crowdfunding platforms will be a good fit, so it’s important to do your research and see which ones could be a good fit based on crowdfunding projects that they have supported in the past.
2. The purpose of the campaign
What is the purpose of your crowdfunding campaign? Crowdfunding isn’t as simple as setting a target and relying on the kindness of strangers to meet your financial needs. Once you’ve selected a platform, you’ll be able to create a description of your project, as well as upload any videos, photos, or additional links to support your idea. The most successful crowdsourcing campaigns follow a strict business plan that defines the project and clearly identifies fundraising needs.
3. The crowdfunding platform’s structure
There are three different crowdfunding models to be aware of: the donation model, the equity/lending model, and the rewards model. If you use the donation model, backers do not receive anything for their contribution, which means that this model works best when raising funds for a charity or a non-profit. The equity or lending model sees funders receive either a portion of future revenue or shares in the company itself. The rewards model offers investors various rewards for different levels of funding. Typically the reward is the finished product, which is the result of the crowdfunding.
4. Platform fees and missed targets
While the act of crowdsourcing itself is free, most platforms do charge a small fee to sign up. Different sites have different fees, but typically, these costs range anywhere from five to 15 per cent. These deductions can come off of the donations, but sometimes there are also hidden service fees attached. Other fees could come from third parties, like credit card companies or PayPal, depending on how the funds are transferred.
Before you create a fundraising goal, do some research to see if the desired target is realistically attainable. If you do not meet your total goal, you will not be charged a fee, but all of your funds will be revoked and returned to the people who donated money. Each crowdfunding website will have a page devoted to terms and conditions where you will find more information on fee structures.
5. Available payment methods
Crowdfunding platforms support multiple payment methods to verify funds. Three popular methods include authorization holds, credit cards, and a capture. Many platforms use authorization holds to ensure that the backer can, in fact, make the payment. The individual’s bank usually holds these pending transactions for a period of 30 days. Authorizing payment from a credit card, like Visa or Mastercard, is an attractive option for investors, but there is a slight risk involved as you are not able to verify that the payment successfully went through. Capturing the full amount at the time of donation and refunding it if the campaign isn’t successful is another option.
6. Platform support options
Some of the most popular crowdfunding sites are celebrated by users based on the amount of support they offer. Some crowdfunding sites offer integrated business tools on top of what’s included in the crowdfunding plan, like Facebook and Google integration, which helps boost your own marketing efforts. Others have set up 24/7 support hotlines or chats that allow you to access information or resources easily. Choose a crowdfunding platform that provides substantial support to your initial campaign goals.
7. Platform restrictions
While you may have thought you’ve settled on the right crowdfunding platform, be mindful of any restrictions. Some types of crowdfunding campaigns, like equity crowdfunding campaigns, have regulations that must be followed. Always read through the terms and conditions of each platform to make sure it is the best option for your project.
Popular crowdfunding platforms
In Canada, entrepreneurs can choose from a variety of websites to bring their projects to life. Below are six of the most popular crowdfunding sites for small businesses and startups.
FrontFundr is a Canadian investment equity crowdfunding platform that caters to regular investors, seasoned investors, and small businesses that are just starting out. FrontFundr connects entrepreneurs with potential investors, and was designed for use by both investors and companies. FrontFundr allows all individuals to invest in companies and keeps a current list of investment opportunities on its home page. As an investor, you will not be charged any fees. FrontFundr receives compensation from the companies raising capital through the FrontFundr platform.
Launched in 2010, GoFundMe offers one of the most versatile and simplistic platforms to raise capital and supports fundraising campaigns on behalf of nonprofits and individuals. It doesn’t charge a platform fee, and it has a team of experts on hand 24/7 to provide support. While there is no fee to access the platform, there are still credit and debit transaction fees.
Started in 2009, Kickstarter is another crowdfunding platform popular amongst creatives and has designated categories for arts, comics and illustration, design and tech, film, food and craft, games, music, and publishing. Kickstarter follows the rewards-based crowdfunding model. Entrepreneurs can pitch their project, and if people like it, they donate money. Once the project goes through, those donors will be charged for their contribution in exchange for the final product. If the project falls short of its funding goal, the donations are returned to their rightful investors, and the entrepreneur is not charged a fee.
Indiegogo was one of the first crowdfunding websites to hit the market when it launched in 2008. Indiegogo charges a five per cent platform fee on all funds raised for the campaign. Fees are calculated and deducted from the funds you actually raise (not the goal you set). For Canadians, Indiegogo charges a 2.9 per cent*+$0.30 transaction fee, as well as a $25 transfer fee, which applies each time funds are sent to your bank account.
Patreon is a popular crowdfunding platform enjoyed by creative professionals. This crowdfunding platform is unique in the sense that you can create monthly subscriptions. It also supports software integrations like Vimeo (for uploading video files) and MailChimp. Unlike GoFundMe, Patreon does charge a platform fee, which starts at five per cent and increases to 12 per cent, depending on which subscription plan you choose.
Vested is another equity crowdfunding platform in Canada that allows people to invest in private companies for as little as $100. The maximum a business can raise from each investor for a project is $1,500. Any investments will be held in a trust until the minimum goal is achieved by the business, upon which your shares will be delivered to you. If the company does not reach its goal, all funds are returned to the investor.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.