Crowdfunding for startups: How does it work?

The crowdfunding process has grown in popularity as the world became more connected via the internet. According to Statista, in 2021, the market for crowdfunding globally was $12.27 billion (£9.2 billion) and is forecast to double that figure by 2027. It’s becoming a popular source of finance, but how does it work?

This article will explain all about a potential funding option for your startup and answer the following questions:

• What is crowdfunding?
• What types of crowdfunding are there?
• What platforms can you use?
• How do you set up a fundraiser?
• How do you get people to invest/donate?

Crowdfunding sources your funding from a large crowd. Essentially, instead of seeking investments from friends, family or venture capitalists, you ask many individuals to help fund you. The idea is that if a vast amount of people contribute a small amount, you can still reach your fundraising goal.

Before you start crowdfunding, you must choose a type that aligns with your goals. According to the Rebuilding Society, there are five types:

• Donation-based crowdfunding — is when you set up a social objective or enterprise, and those who donate do not expect anything back are persuaded by a cause (often used for medical treatments and community fundraising).
• Rewards-based crowdfunding — is when individuals contribute to the business or project to get something in return (usually samples of a product or merchandise like t-shirts).
• Peer-to-peer lending — is when you borrow money from many individuals and pay it back over time with interest (often used for those unable to borrow from a bank).
• Profit-sharing crowdfunding — is when individuals invest to receive a share of future profits or revenue for the business. Investors do not become shareholders and never own the company (often used for software or product development stages).
• Equity crowdfunding — is similar to seeking funding from venture capitalists but in the form of many individuals. Investors provide capital and, in exchange, receive shares of the business (often used for many different startups). 

So you have chosen which type of crowdfunding you would like to use. Now you must select one of the many platforms. According to Investopedia, the top six are:

• Indiegogo — launched in 2008 and funded over 800,000 projects since, but charges fees for setting up and processing.
• SeedInvest — launched in 2012 and funded over 500 startups but has a vetting process that often rejects campaigns.
• Mightycause — launched in 2006 and tailored to raising money for social causes as many of the tools are free, but there is a paid plan for others.
• GoFundMe — launched in 2010, it is aimed at use by individuals, and it has had over 120 million donations, but it charges for using debit and credit cards.
• Patreon — launched in 2013, it was set up to enable creatives to fund their projects and has allowed more than 200,000 to do so, but it does charge various fees based on plans.

So you have chosen the type of campaign you want to use and a platform that suits it. Before you set up the fundraiser, there are a few things to consider:

• Business plan — to convince individuals (and even in some cases, the platform), you must lay out precisely what you are going to do with the funding.
• Unique selling point — to make sure that individuals can get excited about your product or service, you must be sure to express your USP (unique selling point).
• Demand — you need to understand whether there is actual demand for your product or service; it could be critical to conduct market research.
• Realistic goal — you have to ensure that your goal makes sense to the individuals and follows your plan; if you ask for too much or too little, it could give the wrong impression.

After following all of the steps and setting up your campaign in relevant ways, it still does not guarantee success. That comes down to how you sell the idea:

• Title — to get individuals to click on your campaign; they need to be intrigued by your title (think about how you will use this to grab attention and draw them in).
• Pitch — using a video or written pitch, you need to convince individuals to take a chance on your idea (and part with their hard-earned cash).
• Promote — beyond the chosen platform; you need to get the word out about your campaign (use social media, consider paid ads and make sure you do the idea justice).

For more information on social media marketing, see the bottom of this guide.

Now that you have set up your startup campaign and managed to get some funding for your venture, it is essential to keep track of how you are using it. According to research conducted by the University of Pennsylvania for Kickstarter, 9% of projects failed to deliver the promised rewards. Mismanagement can play a significant factor in the failure of a new business.

Financial management can be stressful and time-consuming when you’re running your own business. That’s why thousands of startups use the Countingup app to make their financial admin easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here.

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