What is crowdfunding? How startups can benefit from it

by Kapil Vaishnani  |  23rd May, 2022 in Business Insights

If you’re a startup, crowdfunding is the perfect way to gain exposure and funding for your business. By using a crowdfunding platform, you can connect with potential investors and customers and get the word out about your business. There are many crowdfunding platforms to choose from, and each has its own unique benefits.

While fundraising is the main objective, crowdfunding is also a great way to validate your business idea and get feedback from the crowdfunding community. This article dives deep into the world of crowdfunding and explains how startups can benefit from it.

What is crowdfunding?

Crowdfunding is a great way of raising money from a large group of people, typically through an online platform. Startups use crowdfunding to raise funds from the general public rather than going through traditional sources of funding such as banks or venture capitalists. The global crowdfunding market size is expected to grow by US $239.78 billion by 2026.

Additionally, with the outbreak of COVID-19, the crowdfunding market is witnessing significant growth. This is especially true for donation crowdfunding which was aimed at supporting and helping communities, people, and many organisations in their fight against the pandemic. One example is that of ‘Facebook Fundraiser’ launched by Facebook in April 2020 as a crowdfunding platform where people raised funds for the charity to help others during the pandemic.

There are four main types of crowdfunding:

1. Donation-based crowdfunding

As we have established above, donation crowdfunding is when people give a campaign, company or person money with no expectation of anything in return. For example, let’s say that you create a crowdfunding campaign to purchase new equipment for your business. People who give or donate money do it out of support for the growth of your startup or business.

2. Debt-based crowdfunding

Debt-based crowdfunding is when people loan money to a business with the expectation of being paid back, plus interest. These are peer-to-peer lending. For example, suppose you need $10,000 to expand your business. You can create a campaign on a debt-based crowdfunding platform, and people can loan you the money. You will then repay the loans, plus interest, over a period of time.

3. Rewards-based crowdfunding

Rewards-based crowdfunding is when people give money to a business or individual in exchange for rewards, such as products or experiences. For example, if you’re starting a new SaaS business, you can launch a rewards-based crowdfunding campaign to pre-sell your software. Backers will receive access to the software when it launches in exchange for their donations.

4. Equity-based crowdfunding

Equity-based crowdfunding is when people invest money in a business in exchange for equity (ownership) in the company. For example, suppose you’re starting a new restaurant chain. You can launch an equity crowdfunding campaign to raise capital from investors. In exchange for their investment, backers will receive equity in the company. Equity crowdfunding is alternatively known as investment crowdfunding or securities crowdfunding.

crowdfunding isometric flowchart

 

Benefits of crowdfunding for business

1. Easy access to capital

Crowdfunding makes it easier to raise money than going through traditional sources of funding, such as banks or venture capitalists. With crowdfunding, all you need is a great business idea and an online platform to get started.

2. No need for collateral

With traditional loans, banks often require collateral, such as your house or car, in case you can’t repay the loan. There’s no need for collateral with crowdfunding because the funds are raised from a large group of people.

3. It hedges risks

Crowdfunding is a great way to hedge risks because it allows you to test the market before committing to a product or service. Starting a business can be very risky and challenging. Other than raising funds, there are always other expenses that cannot be foreseen, challenges in market validation, and product-market fit. With crowdfunding, you can reduce the risks by testing out your business idea with the market first before fully committing to it.

If your crowdfunding campaign is successful, it shows that there is a demand for your product or service. If it’s not successful, you can always pivot and try something else.

4. Serves as a marketing tool

Crowdfunding can also be used as a marketing tool to generate buzz and awareness for your business. A successful crowdfunding campaign can help you reach your target market and create a customer base. It’s also a great way to build relationships with potential customers, partners, and investors.

These relationships can be beneficial in the long run, even if your crowdfunding campaign is not successful.

5. Helps you build a community

Crowdfunding helps you build a community of supporters around your business idea. These people can provide valuable feedback and help spread the word about your campaign. Having a strong community of supporters is essential for any business, especially a startup. The easiest way to create and grow a community is through crowdfunding platforms for startups.

Crowdfunding platforms provide the perfect opportunity to connect with like-minded individuals and grow your community. A successful crowdfunding campaign can also lead to press coverage, which can help raise awareness for your business.

6. Enables crowdsourcing of brainstorming ideas

One of the obvious challenges for small businesses, startups, and entrepreneurs is generating new ideas and covering all loopholes at an early stage. With crowdfunding, you can use the platform to solicit ideas from your supporters. This is known as crowdsourcing.

Crowdsourcing is an easy way to generate new ideas and get feedback on your business idea. It’s also a good way to engage with your supporters and build relationships with them.

7. Generates prospective loyal customers and early adopters

Early adopters are crucial for any business, especially a startup. They are the ones who help validate your product or service and provide feedback that can help improve your business. They also help spread the word about your business and generate buzz.

Crowdfunding is a great way to identify and engage with early adopters. By offering rewards or perks, you can attract people who are interested in your product or service and get them to try it out. These people can provide valuable feedback that can help improve your business.

Conclusion

Overall, crowdfunding is a great way for startups to raise capital and build a community of supporters. It’s also a good way to test out your business idea with the market before fully committing to it.

Crowdfunding is a viable option for business start-ups. It’s definitely worth considering if you’re looking for an alternative to traditional sources of funding.
Want more from your crowdfunding campaign? Call or write to Litmus Branding, your one-stop branding agency in India that can help you with all your crowdfunding needs. From planning to execution, we can help you launch a successful campaign and reach your fundraising goals.

Founder - Chairman, Litmus Branding Pvt. Ltd.
Kapil Vaishnani founded Litmus in 2001 to water his passion for creating brands. Kapil’s a creative brain hitched at business. He firmly believes that focused communication is the key and it must carry a purpose that serves both brand and business. Simplicity is Kapil’s power gear that has shaped some of the prominent brands in India and globally. His passion-filled sportsmanship with multi-disciplinary talent is brimming with experience of 20+ years. Talk sense and he is all ears.