What is crowdfunding and how do you get started?

Often one of the biggest hurdles people face when they want to start a business is a lack of funding.

Launching a new business doesn’t come cheap and if you don’t have a goldmine of personal savings to use, getting your head around business loans, grants and investors can be tricky.

But what about crowdfunding? This innovative new way of funding a business continues to grow in popularity and could be the answer you’re looking for.

Crowdfunding can be a gamechanger for smaller startups, but how exactly does it work? Keep reading to discover what crowdfunding is and how you can make it successful.

What is crowdfunding?

Crowdfunding is a unique way of raising finance, usually for a new business. 

With crowdfunding you raise funds by receiving small amounts of money from a large number of people.

Whereas traditional funding methods usually involve a small number of investors or an angel investor contributing large sums of money, crowdfunding switches this round.

Businesses can make use of social media and crowdfunding platforms in order to connect with potential investors to raise the money they need.

There are various different types of crowdfunding:

Reward crowdfunding: investors receive an agreed reward for their investment such as free products, acknowledgements or tickets to live events.

Equity crowdfunding: investors receive shares in the company in return for their investment. 

Donation crowdfunding: investors contribute with no expectation of anything in return (e.g. donating to a GoFundMe).

Debt crowdfunding: investors receive their money back over time with interest.

How does crowdfunding work?

Raising money and capital is a key part of running and growing a business and while larger businesses often have no problems securing funding via loans and traditional investors, it can be harder for smaller businesses and startups.

Enter crowdfunding.

Crowdfunding works by harnessing the power of the internet and instead of having to choose a single investor, business owners collect small contributions from people who believe in their idea.

The average crowdfunding campaign can be broken down into these stages:

1. Choose a crowdfunding type (reward, equity, donation or debt).
2. Select a crowdfunding platform. 
3. Set your financial goal and timeframe.
4. Create your campaign, taking the time to develop a strong pitch.
5. Promote your campaign across social media, email marketing etc.
6. Keep your investors up to date.
7. Deliver on your promises.

Should I use crowdfunding for my business?

Deciding whether or not to use crowdfunding for your business is a big decision. To help you out we’ve listed some of the pros and cons of the funding option.

Crowdfunding pros

• A fast way to raise the money you need.
• Provides access to a larger, more diverse group of investors.
• A great way to test public reaction to your business idea and receive valuable feedback.
• Helps to grow the audience for your business. Many of your investors will also become loyal customers. 

Crowdfunding cons

• Most crowdfunding platforms charge you a fee.
• If you don’t reach your goal, pledged money is often returned to investors leaving you with nothing.
• Failed projects can damage your reputation.
• If you haven’t got a patent or copyright for your business idea, there’s nothing stopping someone from seeing your crowdfunding campaign and copying your idea.

How much does crowdfunding cost?

The good news is that most crowdfunding platforms won’t charge you for publishing your pitch, but they will take anywhere between 5%-12% commission when you reach your target – so be sure to take this into consideration when planning your budget in your business plan. 

Another cost you’ll have to factor in if you opt for crowdfunding is the rewards you offer investors. If you decide on a rewards-based model you’ll need to work out exactly how much the rewards will cost you and factor that into your projections. 

Best crowdfunding platforms

As we’ve mentioned, there are various crowdfunding platforms out there, but which ones are the best?

Kickstarter

Kickstarter is one of the original crowdfunding platforms and has funded over 250,000 projects since its launch in 2009.

Kickstarter projects are rewards-based, meaning you can’t offer equity in your business, and successful campaigns also have to pay a 5% commission.

Indiegogo

Another popular choice is Indiegogo.

Unlike Kickstarter, Indiegogo offers a flexible option meaning you’ll receive your pledges even if you don’t reach your goal plus there’s a feature that allows you to keep raising money even once your goal has been reached.

There’s a 5% commission fee when using Indiegogo.

Crowdcube

Crowdcube is a UK-based equity crowdfunding platform. 

While the platform hosts far fewer projects than competitors such as Kickstarter, it does have various features and benefits including the ability to set private and follow-up crowdfunding rounds.

You’ll pay 7% commission on all funds. 

With so many crowdfunding platforms available, it’s crucial to choose the one that best fits your business model and funding goals.

Successful startups that used crowdfunding 

There have been thousands of startups that have successfully used crowdfunding to get their business off the ground.

Some of our favourite examples include Runna, a fitness training app that raised £500,000 via crowdfunding and The Cheeky Panda, an eco toilet paper company now worth £75million five years after launching via crowdfunding.

Other notable crowdfunding success stories include THIS who raised over £8million across two fundraising rounds, deodorant brand Fussy that started out on the Kickstarter platform and IMPOSSIBREW, an alcohol-free beer that’s raised almost £1million in crowdfunding since 2022.

Impressive stuff! If they can do it, why can’t you?

Tips for crowdfunding success

Crowdfunding presents a fantastic opportunity for small businesses but it shouldn’t be entered into lightly.

You’ll need to carefully consider if it’s right for you. If you do decide to undertake a crowdfunding campaign, here are some top tips for making it a success:

• Set clear and realistic goals that you are confident you can achieve.
• Consider platform fees and taxes etc to ensure you raise the amount of money you need.
• Put effort into your campaign page. Hone your pitch, provide images and videos and be clear on your project and why it matters.
• Keep your investors updated about the progress of your campaign.
• Keep promoting your campaign, don’t expect investors to find you, take your campaign to them.
• Ensure you have the time and resources to answer investor questions and discuss your pitch in more detail.

Final thoughts 

Crowdfunding has transformed the way business ideas become reality, giving small businesses the chance to build a loyal community at the same time as raising funds. 

With the right strategy, your crowdfunding campaign can be more than just a way to raise money, it can be an impactful way to build a loyal community for your brand too.

If you’ve got a business idea but are unsure how to fund it then crowdfunding could be the answer.

Crowdfunding Your Small Business
Discover how crowdfunding works, the different types available and the best crowdfunding platforms to help you raise money for your business.