Ultimate Guide To Crowdfunding By Industry

When brilliance strikes budding entrepreneurs, pioneers, aspiring inventors, and creatives who want to breathe life into their ideas, the steps to turn their vision into reality often involve one crucial thing: enough funds to make it all happen. While established organizations in their specific industries have the financial backing to support their goals, newbies looking to innovate the landscape with their game-changing projects need other ways to raise capital.

Bridging the gap between project owners and potential backers, crowdfunding became the perennial choice in today’s internet-driven age as it acts as a platform that connects people in the community together. While the concept of crowdfunding isn’t new, it’s evolved and matured in ways that make fundraising campaigns accessible for people from all walks of life.

How Crowdfunding Changes People’s Lives 

Crowdfunding aims to raise money to fund a venture or a project by collecting relatively small amounts of money from a lot of different investors. Through crowdfunding, anyone who resonates with your idea and has some extra money to spend can become an investor in companies like yours.

Gone are the days when you had limited options of how to raise capital for your projects. In replacement of traditional bank loans and venture capital options, crowdfunding has become a marquee way for people to fund their dreams over the past several years.

Given its flexibility, it’s important to know the different ways that crowdfunding campaigns can take shape. Different businesses call for different investment types. Read on to uncover which crowdfunding model will work best for your company.

Exploring Different Types of Crowdfunding Models

1. Reward-Based Crowdfunding 

One of the most well-known crowdfunding formats popularized by Indiegogo and Kickstarter, reward-based campaigns are often a go-to choice for consumer product companies. The idea of reward-based crowdfunding is to incentivize people to pledge their money through a benefit, gift, or perk in exchange for their support. 

For example, Beeline is a startup company in the UK that aims to improve the cycling and motorcycling experience with their new, intuitive motorbike navigation device. In return for people’s support in their effort to innovate the rider’s journey, they offered the following tiered rewards:

- Contribution of $129 or more: One Beeline Moto device, one mount, and a future discount.

- $199 or more: A limited-edition machined aluminum Beeline Moto device.

- $229 or more: Two Beeline Moto devices, two mounts, and two copies of the Beeline app.                                                                                                                                                                                                                                                  

It’s a concept that many people can understand: someone who likes the idea contributes money and in return, will receive some benefit from the company.

What are the Advantages of Reward-Based Crowdfunding?

- It’s affordable and feasible for startup owners who don’t want to give away any equity in their business;

- It helps test how the market will receive a product before it’s ever actually created, saving lots of potential time and energy.

What are the Disadvantages of Reward-Based Crowdfunding?

- If the company is unable to deliver the product they promised during the campaign, there are dozens (or hundreds) of people who may be upset.

- The people who contribute money to the campaign don’t actually have ownership of the business.

Who is it most beneficial for?

This type of financing is best suited for product-based companies who want to enlist the support of their potential future customers. Rewards-based crowdfunding requires a lot of marketing and sales effort to get off the ground, so it’s important to have someone with this skill set on the team.

2. Equity Crowdfunding 

Another model to consider, equity crowdfunding provides investors actual ownership of the company in which they’re investing. Rather than using rewards as an incentive, equity crowdfunding incentivizes investors by giving them participation in the future success of the company.

Equity crowdfunding involves raising money from dozens (up to thousands!) of people who believe that the business will pay them back a healthy return over time. . Supporters of these campaigns are often customers of the company raising money, friends and family of the founders, and anyone else interested in seeing the product/service grow in the marketplace.

As with any investors, it’s important to keep in mind that investors in an equity crowdfunding campaign share in the success or failure of the business. So, be sure to remain aware of the legal and ethical responsibilities required to be a diligent steward of investors’ capital. Many online platforms exist to help companies market their equity crowdfunding campaigns and to ensure the entrepreneurs stay compliant with the law.

Unlike other methods of capital-raising for early-stage companies, which typically rely on investment from only a small group of professional investors, equity crowdfunding targets many different types of people. The goal is to raise an adequate amount by appealing to as many potential investors as possible.

What are the Advantages of Equity-Based Crowdfunding?

- Since you are offering part ownership in your company, there’s a strong incentive for people to contribute their capital.

- Upon successful fundraising, you’ll have hundreds of brand advocates with equity in your business. This is a huge advantage if the company knows how to ask for help from their investors.

What are the Disadvantages of Equity-Based Crowdfunding?

- Some business models, products, and services may be difficult for the average person to understand. Equity crowdfunding is difficult for businesses that have complex, hard-to-understand solutions.

- Building an equity crowdfunding campaign is a  very time-consuming process. This is why Beanie & Blazer works with entrepreneurs to help launch and manage successful crowdfunding campaigns.

Who is it most beneficial for?

Equity crowdfunding is great for companies that would benefit from having a network of invested customers, strategic partners, and brand advocates. Since an equity crowdfunding campaign requires a heavy marketing effort, it’s also best suited for organizations with the ability to conduct digital marketing campaigns.

3. Donation-Based Crowdfunding

Another popular crowdfunding model is the donation-based model, which creators use if there isn’t a clear way to provide a financial return back to those who contribute capital. Charities and community-based organizations often use donation-based crowdfunding to ask for small contributions from different people. 

This is conducted on platforms like GoFundMe that help organizations as well individuals fundraise for various causes. With GoFundMe, one can easily raise funds for sudden medical expenses or a business suffering from robbery or fire. Some people use it to raise their business ideas or in the plan for a startup. In short, we can say that GoFundMe is a platform where one can raise funds for their needs.

People and non-profits largely use donation-based crowdfunding to gather support for important causes like funding people’s medical bills, feeding hungry families in an afflicted town, helping a child pay her way into college, and other charitable notions. For example, Fundly used donation-based crowdfunding to support a flood recovery project.

What are the advantages of Donation-Based Crowdfunding?

- It is incredibly cost-effective to launch a campaign since there’s no exchange of money for equity.

- It’s a great way to measure people’s support of a particular cause (like Happy Kids Center discovered about flood recovery).

What are the disadvantages of Donation-Based Crowdfunding?

- Since it’s purely donation-based, there’s no real incentive to get people to contribute money.

- These campaign types work better for individuals and non-profits than they do corporations.

4. Peer-to-Peer Lending 

Decades ago, the only lenders available in the community were banks, but securing a bank loan is hard for new and small businesses that don’t have a strong operating history. As a result, loans often come with high-interest rates, limiting people who don’t have the means and credit score to afford the years-long payment terms. 

Some of the popular platforms that allow peer-to-peer lending are Kiva, Prosper, Lending Circle, and Peerform.

In response to people’s frustration with the outdated views of banking institutions, peer-to-peer lending provided a new path for entrepreneurs to raise debt with more flexible terms.

Unlike official financial institutions, peer-to-peer lending offers secured and unsecured loans. Secured P2P lending is when a loan is issued and is backed by collateral such as property. Unsecured P2P lending is when a loan is issued and supported only by the borrower's creditworthiness, rather than by a type of collateral such as property.

But the latter is the most common offer since getting secured loans requires the support of accredited backers and luxury goods. This makes it one of the most viable lending options for borrowers with low credit ratings, plus benefits such as higher returns and lowers interest rates, which appeal to a wide range of borrowers or even lenders.

The only drawback is that peer-to-peer lending comes with higher risk due to the lack of insurance, government protection, and legislation. Defaulting has a higher probability, so borrowers or lenders considering peer-to-peer lending should always approach this model with greater caution.

What are the Advantages of Peer-to-Peer Lending?

- Peer-to-peer lending can often be the better substitute for banks, especially for individuals or businesses who don’t have the money nor credit score to obtain a competitive loan term. 

What are the Disadvantages of Peer-to-Peer Lending?

- Although you can get favorable rates with peer-to-peer lending, it still involves borrowing money at its core. This means you have debts to repay, and since you’re getting support from different lenders or investors, the pressure to meet payment deadlines is greater compared to banks. 

5. Debt Crowdfunding

Debt-based crowdfunding is a type of crowd-based lending. These include mini-bonds, peer-to-peer (P2P) loans, and invoice financing.

Borrowers get their money from retail investors through a platform while keeping costs down for the borrowers along with potentially giving lenders improved rates of return because there are no middlemen involved in the transaction compared to banks that take cuts.

In debt-based crowdfunding, investors are given a choice to put their money into the security of businesses. Investors can purchase corporate bonds for example, which is like loaning someone else's business money in exchange for interest payments over time (i.e., something that acts as a financial instrument).

What are the Advantages of Debt Crowdfunding?

- It has a competitive or lower interest rate when compared to banks.

- It is more flexible than a traditional bank loan, which makes the repayment easy.

- Your project becomes popular, and more and more people try to become a part of it. 

- It may be easier than approaching venture capitalists, and affordable too!

What are the disadvantages of Debt Crowdfunding?

The major drawback of debt-based crowdfunding is the repayment obligation. Crowdfunders are required to repay loans with interest, which means they have only one option if their idea fails: bear the losses.

The Bottom Line: The Power of Crowdfunding in Different Industries

In each of the different crowdfunding models, the traditional gatekeepers of capital - be they banks, venture capitalists, or professional lenders - are removed from the equation. This allows businesses of all different varieties to capitalize directly from the people who will use, promote, and add value to their company.

Crowdfunding offers creators from all walks of life an accessible path to reach their financial goals in support of turning their vision into reality. In many cases, it makes a great alternative to traditional forms of financing and serves as an excellent complement to angel investing and venture capital loans.

Are You Looking for Investors to Fund Your Vision? 

Chasing after your dreams as an aspiring entrepreneur is undoubtedly exciting, but it takes more than determination and a leap of faith to reach your goals. Every startup needs enough funding to bring novel ideas to fruition but finding the right support can be tricky.

In just six weeks, Beanie & Blazer’s Test The Waters program can help you prepare and launch a trial investment crowdfunding campaign. We leverage the best practices from dozens of successful investment crowdfunding efforts and hundreds of investor discovery calls to help creators build investable companies.

Consider subscribing to our newsletter to stay up-to-date on investment crowdfunding, creator mindset and cooperative capitalism.

Beanie & Blazer does not provide investment advice and is not a registered investment advisor or broker-dealer. Investing in startups is risky, never invest more than you’re willing to lose.

To read the full disclaimer, click here (https://beanieandblazer.com/disclaimer/)

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