Crowdfunding is a collaborative funding model that lets you collect small contributions from many individuals (the crowd). The concept has been around for hundreds of years. It was used in 1884 when the American Committee for the Statue of Liberty ran out of funds for the Statue’s pedestal. Over one hundred thousand Americans donated, with most donations coming in at one dollar or less.
The Internet has allowed crowdfunding to grow exponentially on a global scale, allowing businesses to gain more access to needed capital. In fact, the SBA found that crowdfunding also acts as a way to communicate to investors that your business is feasible and marketable which may increase funding even more. There are literally hundreds of crowdfunding sites in the U.S. and abroad, so getting started is easy.
There are two main types of crowdfunding:
- The donation model is what most people think of when crowdfunding is mentioned. Funders donate money to a cause in exchange for products, special pricing on items, or rewards. Beyond the perks, donation funders don’t have the opportunity to get anything in return for their money. Kickstarter and Indiegogo are examples of donation crowdfunding.
- A more recent model is investment crowdfunding. Businesses sell ownership stakes in the form or equity or debt so funders (more accurately, investors) become shareholders in a sense, and they have the potential for financial return.
Crowdfunding is no sure thing. More than half the campaigns on Kickstarter fail to reach their financial goal. And if you run a retail business, you might want to think twice about using the donation platform. Some people have been critical when, for example, for-profit restaurants ask customers to fund their expansion without getting a stake in the business.