What is Crowdfunding: 7 Crowdfunding Platforms for Entrepreneurs
What is Crowdfunding?
Crowdfunding is the raising of capital from the contributions of multiple (maybe hundreds of thousands) of individuals.
New small businesses often find it difficult to secure bank loans, so appealing to the masses is another way to secure the necessary startup capital, particularly for creative entrepreneurial endeavors. Crowdfunding is also used by nonprofits, artists looking to fund a project, and individuals or charities raising money for a particular cause.
Examples of artistic projects that can attract solid crowdfunding might be the making of a movie about Occupy Wall Street, or the creation of a new iPhone application.
Nonprofits and charities could use crowdfunding for specific endeavors, such as raising money to fight cancer or support the Paralympics.
Entrepreneurs might use crowdfunding to finance a particular project essential to starting their company, such as a rooftop agriculture business raising funds to install a greenhouse.
How does Crowdfunding work?
Crowdfunding is often done on a donations basis. Donors contribute to projects they think are important causes, or are inspirational. In return the entrepreneur may offer them rewards, such as a free copy of their book or other product that was financed. If the fundraiser is a registered 501(c) (3), the donations could be tax deductible.
The other avenue is investor based crowdfunding. The entrepreneur sells securities to the investor, who receives a certain percentage of the profits over a specified period of time. This has been under scrutiny lately in Congress (see below), but recent legislation legalized investor crowdfunding and made it easier for more people to participate.
Anyone can have a website that people can visit and donate on. But many crowdfunding platforms exist that make a project more visible and - to many donors - more credible. These platforms may also offer services and tools to entrepreneurs that help them spread the word about their project and track their fundraising progress.
Kickstarter is the largest and most popular crowdfunding platform. Since their launch in 2009,
Crowdfunding platforms vary on a few points:
- Most at this point are donations based, though some have navigated the uncertain waters of investor-based crowdfunding.
- You can raise funds on these platforms as an individual entrepreneur, a small business, a nonprofit, or an individual raising money for a nonprofit (some are more geared toward one or the other).
- The different platforms all have their own “flavor” and attract specific audiences. For example Kickstarter heavily supports artistic endeavors. StartSomeGood is geared toward philanthropic projects, and Fundable specifically targets "startup businesses," particularly those it seems with a technological angle.
Below is a table listing seven popular crowdfunding platforms for entrepreneurs, a description of what makes them unique, and their basic financial logistics.
Self proclaimed: "World's largest funding platform for creative projects."
Donations based. "All or nothing" model: no funders are charged until the fundraising goal has been met. Only available to American bank account holders.
Has special features for registered nonprofits.
Donations based. If you reach your goal IndieGoGo takes 4%. If you don't reach your fundraising goal you can still take the funds but IndieGoGo takes 9%.
Focused on sustainability issues. Fundraising projects are organized under categories: The Planet, Health, Sustainable Food, Education, Community, and Opportunity.
Donation and Investor based. "All or nothing" model: no credit cards charged until full amount is raised. 33needs takes 5% but only from successfully funded campaigns. Requires American bank account.
Philanthropic, social good projects.
Donations based. Fundraisers set a funding goal, but also a "tipping point" where a minimal amount can still be taken if reached.
Funds the creation of technologically enhanced products such as light sensitive sunglasses or a new iPhone app. Good for creative companies.
Donations and Investor based. All or nothing model. Fundable takes no percent of final amount raised, but charges $99/month during fundraising period.
Attempts to create a community atmosphere between fundraisers, called "creatives," and donors - "fuelers."
Donations based. Rockethub takes 4% if reach fundraising goal, 8% if not and entrepreneurs can still take the funds. Possible to earn bonuses if you exceed your funding goal. Offer "Launchpad Opportunities" to take the project to another level.
Directed at small business startups. Provides many tools for connecting with social media and measuring communications success.
Donations and Investor based. Can only raise up to $1 million. Only for American businesses. Need to register with the state government to legally use investor crowdfunding.
The JOBS Act: Crowdfunding legislation
The JOBS Act (Jumpstart Our Business Startups Act), signed into law by President Obama in April 2012 and set to take effect January 2013, relaxed certain rules for investor based crowdfunding. The federal branch affected is the U.S. Securities and Exchange Commission (SEC), whose role is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
The new law allows people with lower income to participate in crowdfunding. It also does not require private individual donors to be “accredited” by a third party. The aim is for the new legislation to encourage the formation and success of more startups, providing employment opportunities.
Some say that crowdfunding is a bubble, leaving too much room for corruption, and disillusioning entrepreneurs with unrealistic fundraising schemes. However, it can be life changing for those who have been successful, and thus crowdfunding platforms remain an important tool for the small, creative artist or entrepreneur.