Establishing a successful business can be a life-long business venture and full of hurdles. Taking care of business start-ups properly, and in the right sequence, can help boost your chances of success and get your new enterprise to an astonishing kick-off. To get started, you’ll need a solid business plan with a proper cost management and cash flows, and tax compliance once your business has started trading. However, one of the biggest challenges for entrepreneurs and small business owners is finding the funds necessary to launch, grow, and sustain their businesses.

Sources Of Funds

Most sources of funding require dire dedication to acquire. Successful sourcing of funds depends on your business model, projections, and how well you can sell yourself to potential financial partners. Through the years, most small businesses obtain their funding from several different sources including bootstrapping, family and friends, angel funding, etc., phased out over time. Crowdfunding, however, has been gaining a lot of popularity as one of the newer ways of funding business startups.

Crowdfunding As A Funding Option

Crowdfunding is the practice of funding a business by raising fund contributions from a large number of people as a form of crowdsourcing. Crowdfunding makes use of social media and crowdfunding websites to widely network with investors and entrepreneurs together thereby boosting entrepreneurship by potentially expanding the pool of investors who fund the business. In 2015, Massolution report estimated that over US $34 billion was raised through crowdfunding worldwide. Close to 80,000 investors contributed more than $20 million funds on Kickstarter in the same year.

Types Of Crowdfunding

Rewards based crowdfunding – Here the investors contribute typically small amounts of money between $1 and $1,000 in exchange for a reward, which can be the item being produced, such as an album. Kickstarter and Indiegogo are examples of rewards-based crowdfunding platforms.

Equity crowdfunding – Here the investors give larger amounts of money, often more than $1,000 for shares of the company, usually in it’s early stages. AngelList and Crowdfunder are two of the most popular equity-crowdfunding platforms in the United States.

Donation Based crowdfunding – Donors typically donate between, but sometimes more than, $1 and $1,000 for a non-profit or a cause, like drilling a well or building a school. The platforms include GoFundMe and Crowdrise.

Debt crowdfunding – Investors make a loan with the expectation to get paid back both the principal and the interest. It involves borrowing small amounts of money from multiple people instead of a large amount from a single source.

This Is How Crowdfunding Works

Entrepreneurs put up a detailed description of their business on a crowdfunding platform and mention the goals of their business, plans for making a profit, how much funding they require, and the reasons for contributing, etc. Consumers and other individuals can read about the business and fund the idea if they like it. Those giving money will make online pledges with the promise of pre-buying the product or giving a donation. Crowdfunding is free for anyone who really believes in their idea.

Reasons For Crowdfunding

Crowdfunding is crucial for potential generation of interest to the business idea and hence helps in marketing the product alongside financing it. It is also a preface for the viability of the product  an entrepreneur is working on. This process enables the common people to access funds without necessarily going to professional investors and brokers. It also might attract venture-capital investments in the long run if the company has a particularly successful campaign.

Some Crowdfunding Platforms

  1. Kickstarter

Kickstarter is the most active and well-known crowdfunding platform, raising over $2 billion since it’s launch in 2009. The Kickstarter community pledges over $1.5 million daily. Kickstarter’s largest project was the OUYA Gaming platform, which generated over $2.59 million on day one.

Kickstarter backs creative projects only such as films and games. The platform does not accept charity or humanitarian projects or other personal use projects. Kickstarter is known for goal based oriented projects – money is only collected if a project reaches it’s goal, so there’s a bit of a risk involved. Kickstarter also keeps 5% of every successful project.

  1. Indiegogo

Since it’s inception in 2007, Indiegogo has raised over $1 billion. The platform funded over 175,000 campaigns with contributions from 2.5 million people across 226 countries in 2015.

Indiegogo can collect funds for humanitarian projects, and it also offers a flexible funding option that allows you to collect all your donations since it’s not rigidly goal oriented. However, it keeps 9% for this option, compared with 4% for successful, fully-funded, campaigns. There’s also an equity investment option offered in partnership with MicroVentures. The nonprofit was helped by donations from Mark Zuckerberg, Bill Gates, and Google that enabled it to reach it’s goal of raising $5 million in December of 2014.

  1. CircleUp

CircleUp, located in San Francisco, is an equity-based crowdfunding company that helps emerging brands raise capital and grow their business. CircleUp has helped 211 entrepreneurs raise $305 million since it was launched in 2014. The average raise is less than $1 million, and the average investment is $100,000. Most campaigns take between two and three months to close. CircleUp is known for its precise due diligence on the companies it accepts, and most of the investors have deep experience in retail and consumer brands and are willing to provide strategic guidance and support during the process.

Most companies must show revenue of at least $1 million for them to apply, although CircleUp has made exceptions for promising companies with revenue in the $500,000 range. The company offers no-cost escrow services, and it takes a percentage of the raise in commission.

Crowdfunding has been an empowering form of investment that has already changed the contemporary world. The crowdfunding landscape is in for even more change in the world, especially with the new laws within the JOBS Act 2012 of the USA. Crowdfunding is certainly a feasible way to get your idea off the ground and running, and looks like it will continue to see good use well into the future.