In the past, when someone wanted to fund something — be it a project, a company, or anything that required capital to start — there were a few ways to raise money. They could take on debt from a loan. They could raise money from friends, family members, and angel or VC investors. They could even take the “bootstrapping” route and scrounge up as much money as possible to fund the project themselves.
In the late 2000s, a fourth option became viable for those trying to get something off the ground: crowdfunding.
is a way to raise money from a large number of people. Large groups of
people pool together small individual investments to provide the capital
needed to get a company or project off the ground. Individuals,
charities or companies can create a campaign for specific causes and
anyone can contribute.Join thousands of investors
Republic is a vibrant investor
community of 1,000,000 strong. Become an investor
Types of crowdfunding
- Securities-based crowdfunding provides opportunities for people to invest in private companies (aka, startups). In this type of campaign, investors receive the promise of stock, future shares or another security issued by the company in exchange for capital. We’ll primarily discuss equity-based crowdfunding, but there are many different types of crowdfunding, including:
- Donation-based crowdfunding is when someone donates to a specific cause or charity (think GoFundMe).
- Reward-based crowdfunding is exactly what it sounds like. People donate to unlock a specific reward linked to the project they support. For example, you might help fund a new product line and later receive that product in return.
- Peer-to-peer lending allows individuals to obtain loans directly from other individuals without a bank or other financial institution acting as a middleman. Think of this as debt crowdfunding.
- Real estate crowdfunding offers individuals opportunities to invest in real estate projects. This is especially useful for people who are interested in real estate investing, but don’t want to deal with mortgage brokers, real estate agents, or contractors. This is a specialized type of securities crowdfunding.
- Human capital crowdfunding is a way for people to raise money to back their personal growth or projects. Investors are given the opportunity to fund a project in exchange for a share of the winnings. For instance, many poker players crowdfund money to play, and then distribute a share of their winnings back to investors.
What is crowdfunding for companies?
Like other organizations, businesses can use crowdfunding to raise capital for their venture. When we define crowdfunding in business, we mostly think about startups, angel investments, and transactions outside of the traditional financial institutions. Put simply, crowdfunding for business presents a great opportunity for startups to source a large group of investors efficiently.
Crowdfunding opens early stage investment for innovative companies
with diverse teams and a social mission, while also empowering the
masses to not only actively fund the companies they believe in, but also
benefit from that growth.
Brandi DeCarli, Farm from a box.Founding partner
How does crowdfunding work for companies?
Platforms like Republic have made it easy for people (or backers, as they’re often called) to invest with just a few clicks. Typically, crowdfunding campaigns have a set goal and offer incentives to those who invest. If the goal is met, the backers usually benefit from supporting that campaign. If the company has an exit event in the future, like an acquisition or initial public offering, backers can earn cash or stock.
How is crowdfunding different?
In crowdfunding, numerous investors are invited to participate and contribute their share of the pie. This is a dramatic step away from more traditional fundraising, where companies and institutions seek capital from one or a few major investors. Crowdfunding is also primarily done online, whereas other forms of financing mostly occur offline.
The benefits of crowdfunding
The benefits of crowdfunding go way beyond raising money.
Gaining access to capital is hard for most new ventures. Many early-stage companies are passed over by VCs for a variety of reasons, and getting money from banks or rich family members are hardly sound strategies. Crowdfunding levels the playing field by decreasing reliance on traditional and sometimes exclusive fundraising methods. Crowdfunding campaigns are also unique in their ability to draw interest from new users and drive engagement. Since one must engage the crowd to be successful, campaigns provide an incredible platform to raise awareness for a company, brand, product, or service. The campaign goal and timeline create a sense of urgency that motivates investors. Thus, crowdfunding presents startups with the opportunity to build buzz and secure early adopters. Startups can connect with potential customers who could also serve as investors and brand ambassadors. A successful campaign proves that there is interest in a product while simultaneously providing the runway necessary to support new project initiatives.
The main benefit of crowdfunding is that you, as an entrepreneur
(especially in tech), can now raise outside of the conventional means
(VC and angel). Often, we chat about friends and family rounds and
institutional investors being necessities for tech growth. For Black
founders, our journeys are far from conventional because the systems in
place have never thought of us as being conventional. Equity
crowdfunding aligns with that.
Ofo Ezeugwu, WhoseYourLandlord.CEO & Co-Founder
From an investor’s perspective, crowdfunding provides an
easy way to fund projects and people that you genuinely believe in and
care about. In addition, crowdfunding allows investors to invest small
amounts in multiple ventures, thereby diversifying their portfolios and
maximizing the chances of a big payout. While crowdfunding is a high
risk investment, where investors should only invest capital they are
comfortable losing, hypothetically, all an investor really needs is one
blockbuster investment to recoup other losses and realize a large
return. Join thousands of investors
Republic is a vibrant investor
community of 1,000,000 strong. Become an investor
The risks of crowdfunding
From a company’s perspective, crowdfunding can be a great way to raise funds quickly. While it requires a lot of work, promotion, and attention to have a successful crowdfunding campaign, over 90% of startups on Republic have raised successfully. Though success is never guaranteed, platforms like Republic use every available resource to bring more awareness to each campaign.
From an investor’s standpoint, just like other forms of investing, crowdfunding has its own risks.
For one, investors could lose their entire investment. Just because a company meets its crowdfunding campaign goal, doesn’t mean that company is bound to succeed. In fact, most startups fail, and if that business does not succeed, an investor will likely lose all the money invested. Even if a company does succeed, it may take years for any returns to materialize.
There are always risks associated with crowdfunding campaigns. Investors need to be sure to vet any funding project to make sure their funds will be used appropriately and towards a credible company or cause. (Republic helps mitigate this risk by doing a thorough background check on all companies who raise on our platform.)
It is worth mentioning that, with the expansion of the private investing market, startup investing platforms like Republic have internal teams dedicated to lessening risks associated with the private market. Though these companies are nowhere near as tightly regulated and scrutinized as public companies, fraud prevention and other safeguards are put into place to ensure that accurate information is available. That way, investors can make informed decisions.