Financing has always been a big challenge for new startups. But as evidenced by the growing number of Kickstarter success stories, the business world is learning how effective it can be to raise money through small contributions from a large number of people.
As the popularity of crowdfunding continues to skyrocket, more startups and small businesses are taking advantage of the various trends that emerge in this space in the coming years. Here are three big ones to watch.
Crowdfunding will remain a popular funding choice
In years past, crowdfunding for businesses was a novelty, a rare exception to the traditional methods of bank loans, venture capital and borrowing money. Today, announcing your crowdfunding campaign is just as common as any of these other options, if not more so. In fact, Forbes reported that in 2016 crowdfunding is expected to surpass venture capital as a means of financing.
"Many major news organizations are now highlighting noteworthy campaigns," said Bill Clerico, co-founder and CEO of WePay, a payment service provider for crowdfunding, marketplace and small business platforms. "That's not just good for the campaigns, but it also normalizes the behavior and leads to more people [giving to] crowdfunding [campaigns]."
Nonprofits will benefit more from crowdfunding
While businesses in any industry can use crowdfunding, the nonprofit and charity sector has particularly benefited from the growth of this financing method.
"This entire industry is being disrupted with the introduction of crowdfunding of donations," said Anisa Mirza, CEO and co-founder of charity crowdfunding platform Giveffect.
"Charities are seeing a twofold benefit from crowdfunding," Clerico added. "First, it's proven to be an extremely efficient way to solicit and manage donations compared with other methods. Second, the additional social and viral potentials of crowdfunding campaigns can give smaller charities a cost-effective way to create awareness for their cause."[See Related Story: Crowdfunding for Startups: 7 Sites for Business]
Equity crowdfunding will grow
In 2012, Congress passed the Jumpstart Our Business Startups (JOBS) Act to bring equity crowdfunding to the forefront. After three years of being stalled, the final provisions of this multipart bill were approved in 2015, and made it possible for small businesses nationwide to raise money through equity crowdfunding, even across state lines.
In an interview about Title IV of the JOBS Act (also known as Regulation A+), Alex Feldman, CEO and founder of crowdfunding review site CrowdsUnite, told Business News Daily that the rule will allow a much greater percentage of private startups to receive investment money. He noted that investments in small, community businesses, such as local restaurants or boutiques, will be driven by customers who want to keep those businesses running.
"This will be a huge shift in the traditional funding paradigm that will change how small businesses raise money," Feldman said.
For more information on direct public offerings through equity crowdfunding, see this Business News Daily article.
Tips for new crowdfunders
If you're hoping to launch a crowdfunding campaign in the near future, you should read the fine print on the platform or site you want to use, Mirza advised. Not all crowdfunding platforms are created equal, and before you launch a campaign or make your account, you should know the ins and outs of the site.
"Truly understand the platform you are choosing," Mirza said. "From traditional crowdfunding venture firms like Brightspark to platforms like AngelList, or even general platforms like Indiegogo and Kickstarter, there is a myriad of options. And chances are there is one that is better than others for your startup."
You'll also need a solid marketing plan to get your campaign off the ground.You may have a great idea that people are willing to fund, but if they don't know about it, you'll never see a dime of their money. Clerico reminded campaigners that crowdfunding is a challenging marketing exercise, and you need a strong, well-executed plan to raise the capital you require.
"Calculate how many people need to give at a specific amount to achieve your goal, and then devise a marketing plan to reach that many people," Clerico said. "Be sure to identify early champions, those who can rally their network to help you reach your goal. Reaching out to media outlets and blogs can help your campaign get distribution as well."
Jonathan Wilson, an attorney at Taylor English law firm, said he agreed: Although communicating with potential investors is easier than ever before, you need an organized campaign to make it work, he said.
"Campaigns fail that don't have their business plans fully baked before they launch," Wilson said. "Invest the time to complete a business plan and all of the related contracts before trying to tell [your] story through crowdfunding."
While crowdfunding may never fully replace traditional funding options, Clerico said he believes small businesses, especially those outside of the tech industry, will continue to benefit tremendously from this method of raising capital.
"Crowdfunding is here to stay. By 2025, the global crowdfunding market potential could be between $90 billion and $96 billion," Clerico said, citing data from the World Bank. "Crowdfunding will grow dramatically as a way to finance nontech businesses that have been traditionally financed by bank loans and friends and family. The opportunity here is enormous, and crowdfunding has barely scratched the surface of the small business financing opportunity."