What’s the ideal way to crowdfund a startup?

Crowdfunding is quickly becoming one of the most popular ways of funding new ventures, and more are recognizing its strong potential.

There are many benefits to this type of funding compared to others – it doesn’t require any special investors, it helps you conduct some initial market research, and it may even generate a lot of hype about your product before it’s arrived to the market.

There are several types of crowdfunding that you should consider, each with their own advantages and disadvantages.

Reward-based Crowdfunding

This type of crowdfunding is the most popular one at the moment, and also the one with the best prospects for certain types of products. The idea is that you offer some type of reward for each investment in your business, and the rewards can vary a lot according to the type of product and company you’re dealing with. You may be inclined to give out valuable things, like physical products, or you can also use a simpler approach and do something like mentioning winners on your social media profiles.

It’s also worth noting that there are no regulations on reward-based crowdfunding at the moment, meaning that you’re usually under no real obligation to give out the promised rewards in case things go bad. Unfortunately, some have exploited this loophole and have attracted a great deal of negative attention to this type of crowdfunding.

Equity-based crowdfunding

With an equity-based system, you can receive investments from a number of people and pay them with equity in the company. How much you’re going to give to each person involved is up to you, although you should definitely put some effort into making things fair, as otherwise, this could come back to bite you once it becomes public knowledge. You should additionally research the right platform for your crowdfunding operation.

Debt-based crowdfunding

Most people are familiar with the idea of taking out business loans to fund a business, and debt-based crowdfunding is somewhat similar, although not quite the same. Instead of borrowing from a financial institution, you instead take out your loan from a number of different investors interested in seeing your business progress. Their own investments may, in turn, have some corporate backing, but that’s usually irrelevant to you in the grand scheme of things. And just like with a regular loan, you should be absolutely sure of your ability to repay it in a timely manner before moving forward with this type of crowdfunding.

Donation-based crowdfunding

Last but not least, we have a slightly different type of crowdfunding that’s not as popular among many businesses, but can still work out nicely in the right circumstances. Donation-based crowdfunding involves simply reaching out and asking for donations to your campaign, often without offering anything at all in return. While this may sound tricky to pull off, there are various businesses and environments where it can work out nicely, especially if you already have some presence on the relevant market. Make sure that you have developed your idea perfectly though, as it will be scrutinized much more than with other types of crowdfunding campaigns.