Traditional Crowdfunding VS Equity Crowdfunding

By | 03/05/2019 | 9:24 am ET

If your company has always thought about crowdfunding as only a means to fund charitable causes, then it’s about time you changed that perception.

Since the coming of Indiegogo in 2008 and Kickstarter the following year, business owners have become exposed to how effective crowdfunding can be as an option to raise funds. After all, who ignores an industry like crowdfunding estimated to grow to nearly $10.9 billion in total funding in 2015 from $1.5 billion in 2011.

Equity crowdfunding is the latest model making waves in the crowdfunding industry since the passing and implementation of the Title II of the JOBS Act – The Jumpstart Our Business Startups Act – in 2012 and 2016 respectively. Since then, online equity investment has grown briskly in the first year from zero at the starting gun to an estimated $217 million in investment committed online.

One of the popular examples of how effective equity crowdfunding can be is the project of The Bitvore Corporation – a developer of AI and big data mining systems – raised almost $1 million  in its first year using the equity crowdfunding model , the funding rose to about $8.4 in the third year.

In this post, I’ll share all you need to know about traditional crowdfunding models and how they differ from equity-based crowdfunding, and why you should consider using equity-based crowdfunding in your next campaign.

Differentiating Crowdfunding Models

In the market today, crowdfunding platforms have evolved into three different types of models.  These include donation-based platforms such as GoFundMe, rewards-based platforms such as Kickstarter, and equity-based platforms such as Wefunder.

Donation-Based Crowdfunding

Donation-based crowdfunding involves people coming together to raise money for altruistic reasons. It is not to be confused with reward-based crowdfunding. In donation-based crowdfunding, people connect to raise funds for services and programs that help solve a particular problem. The major aspect of donor-based is that there is no reward for donating, rather it is based on the donor’s concern for others wellbeing. GoFundMe is the most popular donation based company worldwide and has raised over $3 billion and helped reach millions of people. Fundly and Crowdfunder are popular donation-based crowdfunding platforms.

Equity-Based Crowdfunding

Equity crowdfunding is the collective effort of individuals to support ideas initiated by other people or organizations through the provision of finance in the form of equity.  In an equity-based funding, the company running the campaign is basically selling bits of its ownership – in form of shares, membership or interest – to each member of its community that are raising funds for the company. Equity-based crowdfunding campaign is ideal for entrepreneurs and startups seeking an alternative to venture capital and angel investors when gathering capital for their business. Popular equity based platforms include EquityNet, Republic, StartEngine, WeFunder, SeedInvest, MicroVentures and TruCrowd.

Reward-Based Crowdfunding

Reward-based crowdfunding involves people supporting a cause for a reward or discount and not as equity. This model is also called non-equity fundraising. Investors on rewards-based platforms are often called pledgers or backers. The platforms will most frequently list projects allowing the backer to pledge an amount of money for a reward. The system is structured to ensure the largest backers receive the highest value or most unique reward. Most times the type of businesses on these platforms focus on pre-sales to bring something into creation or prove a concept. Top rewards-based crowdfunding platforms include Kickstarter, Indiegogo, Pozible, RocketHub and Patreon.

Top 10 Reasons Why you should Use Equity Crowdfunding

  1. The company sets the investment terms. The crowdfunding company alone owns the idea, runs it and sets the investment terms, including valuation and how much capital they hope to raise.  This of course can be dependent on what the market is willing to pay for shares in your company but overall the decision is yours.
  2. Instant access to capital. Equity crowdfunding campaigns can generate up to $50 million from the earliest periods of campaigns, providing a great means to instant fund for your ideas.
  3. Take your company public. Depending on the size of your company, you can start out with a Reg CF raise up to $1 million and then transition to a Reg A+ raise of up to $50 million which are both equity crowdfunding raises.  You can use Reg A+ to go public and list on NASDAQ, NYSE and OTC Markets.  This can benefit your company’s valuation and provide opportunities for additional funding and growth.
  4. Alternative to banks and angel investors. Equity crowdfunding for your business is a great alternative to banks and angel investors. It is relatively affordable, making it accessible for most startups and entrepreneurs. Many fundraising platforms charge nothing to start your campaign, and only take a small percentage of your funds if the campaign is successful.
  5. Brand ambassador. Equity crowdfunding helps to nurture a base of people that engage with your brand beyond just using it. When people invest in a startup there’s a tendency to promote and be concerned about that brand. Investors in your business can be influenced to become brand ambassadors, dedicated to making your business successful. Entrepreneurs can rely on the crowd of investors for feedback and ideas to improve, especially at the beginning.
  6. Builds a network of investors. As your business grows, the investors from your fundraising campaigns are still involved – and they’re more likely to invest in future ideas because they know you will deliver.
  7. Gains credibility. Equity fundraising campaigns can give your business credibility when approaching angel investors. The success of a fundraising campaign encourages other investors that your venture has sufficient market validation.
  8. Early Insight to Market Reactions. Equity fundraising campaigns help you pitch your concept and provide you with real insight into your user reactions and analyze the market. This can help greatly to adjust your business plan for growth when required.
  9. Generates free media exposure. If a crowdfunding campaign becomes a hit, it easily attracts media attention. Crowdfunding can help pick up widespread media coverage which increases your chance of massive success.
  10. Minimizes Overall risk. The business relies on a large pool of investors from your crowdfunding campaigns who invest at lower levels, minimizing overall risk.
  11. Opportunity for Niche Ideas. Crowdfunding is great for promoting business ideas that are usually restricted to specific audience, that wouldn’t otherwise have access to a receptive audience or funds.

Conclusion

Equity crowdfunding is very important for business growth, especially in startups. Every startup should use a crowdfunding campaign. Apart from the advantage of having a lot of acquired users you have a potential community of brand ambassadors. When you intend to launch an equity-based campaign, ensure that you understand the rules. It is a little complicated, and if you intend to pursue this kind of funding, investigate it very carefully with the help qualified financial providers, like EquityTrack.

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