The best crowdfunding for startups
So you’re thinking about asking the crowd for funding but which crowd, or in other words: What is the best crowdfunding for startups?
Let us walk you through it. But before we get to the best crowdfunding for startups, let’s start with the crucial question …
When should you use crowdfunding?
Crowdfunding isn’t for every startup.
Typically, it suits raising money for a fixed outcome, such as creative projects like films or albums or not-for-profit community ventures.
And increasingly, with recent law changes, you’ll also see more Australian proprietary companies using equity crowdfunding too.
What types of crowdfunding are there?
There are two main types of crowdfunding – reward-based and equity.
Reward-based crowdfunding has been around the longest. It involves posting a project on a crowdfunding site, targeting a certain amount of money to raise. People who donate money receive a reward, which is realised if you meet your funding target.
It is also popular for technology products, especially video games and ‘gadgets’ like the Pebble watch and Occulus Rift. For product-based startups, crowdfunding can be a great way to see if you can get traction before you invest in full manufacturing and distribution. And if you are successful with it, it ticks a big box that other investors will want to see further down the track.
If it is worth trying for your startup, it’s usually most appropriate at seed stage. That means after the bootstrapping and first friends/family round, and before approaching angel or venture capital investors.
Equity crowdfunding allows people to invest small amounts in exchange for equity in your company – for as little as $250 in some cases.
Equity crowdfunding for startups in Australia has recently been opened up after the government passed legislation making it possible for proprietary companies (i.e. with Pty Ltd in their name) to use it.
This is great news for startups because previously they had to convert to an unlisted public company to access this funding source, which came with extra upfront effort and ongoing red tape.
Now you don’t have to, and you can read more here about how this opened up equity crowdfunding for startups.
What are the best crowdfunding sites
The best crowdfunding for startups … well, that depends on your product and what is happening in the crowdfunding world at the time.
Speaking of time, take some to read the ‘about’ page of each crowdfunding platform you’re considering and any other information on each site. This will help you understand what it has the most success in, and therefore who its crowd is and what they like to invest in.
Also look at their recent successes. If they’ve just had a really successful campaign for a product or venture that is very similar to yours, it might be best to try a competing crowdfunding site to avoid investor fatigue.
And when considering the best crowdfunding for startups, consider the differences between reward-based and equity crowdfunding.
For reward-based campaigns, can you offer enough appealing rewards to entice donations?
Equity crowdfunding for startups is different again. Obviously, you need to be comfortable with giving up equity in your company (to people you don’t know).
On the flipside, the main benefit of equity crowdfunding is that it gives customers ownership of your product. They can be powerful marketing allies because they are personally invested in your company.
There are also some pretty strict equity crowdfunding regulations in Australia, including:
- Companies need to have an annual turnover or gross assets of no more than $25 million in order to use it
- Companies can raise a maximum of $5 million via equity crowdfunding per year
- Companies are subject to transaction rules and stringent reporting and disclosure obligations, such as annual reports and director reports
- If you raise $3 million or more, you will also be subject to auditing requirements
And all of that costs.
For a startup, the costs of meeting these legal requirements might be too high. Because you definitely need a lawyer if you’re going down this path, such as Legal Vision, who we like working with.
And a startup accountant is handy too. Like us
Because however you’re raising capital, there’s usually more preparation work than you expect, including making sure you have your historical financial and tax info up to date and a clear financial plan for the future.
What other types of startup funding are there?
While focusing on the best crowdfunding platform for startups, don’t forget there are lots of other sources of funding too.
We’ve explained them all, including where they fit into the funding life cycle, in our free Startup Founder’s Guide to Funding ebook, which is especially for early stage startups.
Or you might be interested in our startup funding rounds article here or a quick guide to determining your startup’s valuation here.
Otherwise, thank you for reading and go well!
Image by Josh Sorenson on pexels.com
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