How Does Crowdfunding Work?
5 Important Steps
8 min. read
Crowdfunding is a relatively new way for companies, groups and even individuals to raise funds from a large number of people who believe in them. Many people (“the crowd”) contribute or invest a relatively small amount of money ($10, $100, $500, …) that collectively totals large sums.
This funding method offers big benefits to Startups that can raise capital while expanding their base of supporters who now have a vested interest in the company’s success. They may also benefit from the feedback of early fans to refine solutions, strategy or messaging.
Those who contribute or invest in these campaigns may also see big benefits while getting to support a great cause or invest early in an idea they believe will make it big. (Ever wished you could have invested in Facebook when it was a Startup? We have, too.)
“The global market for crowdfunding is estimated to be USD 10.2 billion in 2018 and is expected to reach USD 28.8 billion by the end of 2025, with a 16 percent increase from CAGR in 2018 to 2025.”
Here’s How Crowdfunding Works for Startups
There are five important steps for those raising funds.
1. Decide what type of crowdfunding best suits your needs. Three main types include:
➜ Charitable: Individuals donate to support a cause expecting nothing tangible in return (good vibes only). Lots of great examples on GoFundMe.com.
➜ Equity: Individuals invest in return for future equity in your company if it reaches a successful exit (such as an IPO, acquisition or sometimes an additional funding round). You can find equity-based campaigns on Fundify.
Investing in private companies for equity used to be open only to wealthy people who qualify as “accredited investors.” But recent U.S. legislation – implemented through Regulation Crowdfunding in 2016 – gives almost everyone the ability to invest in private companies. This market is experiencing rapid growth with even more expected ahead.
2. Find an approved online platform that can help you raise funds.
Crowdfunding campaigns run online through sites like Fundify.com. When selecting a platform, look for features you need such as robust campaign pages, real-time funding updates, tools to communicate easily with potential investors or contributors, and a system that simplifies any regulatory compliance. Consider the connections that can be made through the platform’s funding approach and any needed flexibility on the structure of the funding campaign. Also look for secure transactions, quick funds distribution at the end of the campaign and low fees.
For equity crowdfunding, you’ll need to apply to be listed on the platform so be ready with company details, financial statements from the last two years and your business plan.
3. Upload campaign info.
This is a fun step where you get to show the strengths of your company or cause. Got an intro video? Pitch deck? Team headshots and brief bios? How about examples of media coverage or awards you’ve won? Here’s where you get to put your best foot forward and create engaging campaign pages, usually from template-based systems that are easy to use.
Raising Funds through Equity Crowdfunding? Submit Form C
You knew a government form would be involved somewhere, right? To raise money through equity crowdfunding, you’ll need to submit Form C to the SEC. On Fundify, the information you’ve already uploaded to our system flows directly into a streamlined program we've built. That means less work for you.
4. Launch! Share! Engage!
Once you’ve hit the launch button, it’s time to let the world know that you’re raising funds.
Reach out to your close contacts and best prospects first to gain traction and momentum. Then, continue to your next-level contacts and followers across social media. Folks who don’t know your business or project well are likely to be more interested in a campaign that already has traction.
Give them a link directly to your campaign page through which all investments flow and engage with potential Investors by answering questions and sharing insights to help them understand the unique opportunity. People appreciate quick, helpful answers so keep a close eye on your campaign discussion board.
5. Finish strong!
An equity crowdfunding campaign concludes when you’ve raised the maximum amount you’ll accept or the campaign deadline arrives. These campaigns run at least 21 days and usually conclude within 90 days, according to the SEC.
If you’ve raised at least the minimum target you’ve set, then it’s time for high fives for a successful campaign. Investors will be notified of the campaign’s conclusion, and proceeds will be transferred to your company. You submit a Form CU to the SEC and then continue communicating with Investors at least once a year as you put the funds to work building your business.
On Fundify, we invite our alumni to remain part of our community to continue expanding their network and share the valuable insights they’ve gained.
If the campaign did not reach the minimum target, committed funds are returned to would-be Investors. Startups can address any stumbling blocks they encountered and launch a new campaign down the road.
Charitable crowdfunding campaigns often stay open until the creator’s deadline or indefinitely. And rewards-based platform Kickstarter recommends a 30-day campaign for best results.
If equity crowdfunding sounds like a good fit for your business, apply here to be considered for Fundify’s growing Marketplace.