Crowdfunding: Advantages, Challenges and Tips for your campaign

Crowdfunding is a modern financing method that is particularly popular among startup founders. In crowdfunding, a large number of people (the "crowd") offer their financial support to a company or project.

This is typically done through online platforms where projects are presented and funds are raised from interested parties. This form of funding has become an alternative to traditional sources of investment and also allows for community building.

Crowdfunding became a global phenomenon, particularly in the early 2010s, thanks to platforms such as GoFundMe, Kickstarter, and Indiegogo. Like many trends in the financial sector, crowdfunding as we know it today originated in the US, where all the platforms mentioned are based.

However, German platforms such as Companisto, Invesdor, and Seedmatch are also on the rise.

Key takeaways

• Crowdfunding is a financing alternative that supports projects with contributions from many small investors.
• Different types of crowdfunding offer different rewards for support.
• Careful planning and communication are important for a successful crowdfunding campaign.

What is crowdfunding?

Crowdfunding is often used as a general term for different types of financing that involve private investors as investors.

In Germany, the term “Schwarmfinanzierung” is also often used as a synonym for crowdfunding.

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Specifically, crowdfunding means that many small investors have the opportunity to invest financially in a startup, organization, or project of their choice. The special thing about crowdfunding is that investors need a very low minimum investment to participate. On many German platforms, this is as low as 250€.

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It is important to note that there are different types of crowdfunding and the term itself does not provide any information about what exactly you are dealing with as an investor or entrepreneur.

What types of crowdfunding are there?

As mentioned above, there are different types of crowdfunding with different characteristics and objectives. The most common types are described below.

Reward-based crowdfunding

In reward-based crowdfunding, supporters receive something in return for their financial contribution. This can be in products, services, or other non-monetary rewards.

This type of crowdfunding is often used by startups or private individuals to develop innovative products where supporters are directly involved as customers at an early stage in the form of pre-sales.

Donation-based crowdfunding

Donation-based crowdfunding involves no material or financial consideration at all. This type of funding is more interesting for artists or content creators and less so for startups.

The incentive here is that the donation promotes the project or person and thus improves it. It is a win-win situation.

In addition to promoting the project, a thank you or mention is often offered in return. A popular donation-based platform is Patreon.

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Equity-based crowdfunding

In this type of crowdfunding, investors buy real shares in the startup.

The promise to investors is that the shares they buy will increase in value and can be sold at a later date for a profit, or that they will share in the startup's profits.

Participation can take several forms, either through the purchase of shares or through classic participation as a shareholder in a limited liability company (German GmbH). More flexible forms of participation are also popular, such as participating in subordinated loans (“partiarisches Nachrangdarlehen”), convertible loans, or profit-sharing rights.

In Germany, the term crowdinvesting is often used as a synonym for equity-based crowdfunding. Internationally, however, the term equity-based crowdfunding is more commonly used.

Tokenize.it offers you the opportunity to set up your crowdinvesting campaign quickly and easily with the help of GmbH tokens and provides you with the appropriate contract templates. The GmbH tokens enable a completely digital, clear, and secure participation of small investors.

Does this sound interesting, but do you have specific questions about implementation?

Then leave us a message using our contact form, or arrange a non-binding consultation meeting directly. We look forward to hearing from you!  

Lending-based crowdfunding

Lending-based crowdfunding means that small investors lend money to your startup in return for interest.

They act as lenders and your startup pays back the money with interest over an agreed period. This type of funding is similar to bank funding, but the terms are usually better for you as the founder.

Advantages and disadvantages of crowdfunding

Crowdfunding is not for every startup. If you are considering it, weigh up the following pros and cons.

Advantages

Control over your company: With crowdfunding (except equity-based crowdfunding), you, as the founder, retain full control over your business because no actual shares in the company are sold to investors.

• Test market interest: The response to a crowdfunding campaign gives you an insight into how the market reacts to your product or idea. This gives you valuable feedback on your business idea.
• Community building: You can build a community around your product that will not only fund but also drive marketing and social media reach.
• Marketing and visibility: A crowdfunding campaign can serve as an effective marketing tool and raise awareness for your startup.
• Social media: Social media allows your campaign to spread quickly and widely, increasing the chances of successful funding.
• Rewards: By offering rewards, you can incentivise supporters to participate in your campaign.

Disadvantages

Financial risk: Some crowdfunding platforms operate on an all-or-nothing basis. This means that you only get the money if you reach the campaign goal. If you don't, the funds raised are returned to the crowd.

• Fees: Platform fees and possible payment fees can reduce the net amount you receive from your campaign.
• Building trust: Potential backers need to trust your project, which can be difficult without a reputation.
• Restrictions: Not all projects are suitable for crowdfunding, and specific rules on platforms can make it difficult to get your campaign off the ground.

How does crowdfunding compare to other financing models?

Crowdfunding is particularly interesting for you as a founder as an instrument of early-stage financing.

In contrast to venture capital firms or angel investors, who invest larger sums and often want substantial shares in your startup in return, crowdfunding (except equity-based crowdfunding)  allows you to raise capital without immediately selling shares in the company or paying interest, making it fundamentally different from other forms of financing.

Another difference is that venture capitalists look for scalable business models with high growth potential and usually want to have an active influence on the management of the company. Crowdfunding, on the other hand, focuses on validating the business idea through market demand and provides a platform for a variety of projects that are often more focused on building a community.

As a founder, this gives you greater independence, but you also need to ensure effective marketing and a strong community bond to mobilize sufficient support.

Tips for your crowdfunding campaign

When launching your crowdfunding campaign, careful planning is essential for your success. Here are some proven tips to help you get started:

Tell your story: People support projects to which they feel emotionally connected. Craft a clear and appealing message that highlights your vision and the uniqueness of your startup.

Strategic marketing: Plan a marketing strategy that includes multiple channels. For example, you can use email campaigns and social media to inform potential supporters in advance and generate attention.

Professional video presentation: Short videos are a great way to make a personal connection with your audience and present your business idea in just a few minutes. It's best to star in the video as the founder. This builds trust.

Building a Community: If you have already built up a loyal community before the start of your campaign, this will give you an advantage in terms of your reach. As crowdfunding campaigns are often time-limited and linked to an investment target, it is worth building up a community in advance to achieve the investment target in the specified time frame.

Clear communication: Transparent and structured communication about how the funds will be used and what the goals are is of course a prerequisite for building trust.

Precise calls to action: Clear calls to action help your potential supporters understand how they can contribute. Give them the motivation to become a part of your campaign.

Conclusion

Crowdfunding has become an interesting alternative source of funding for startups in recent years. Through the support of the "crowd", this method provides financial resources and enables the building of an engaged community.

Crowdfunding takes various forms, including reward-based, donation-based, equity-based, and lending-based crowdfunding. These different approaches offer different rewards to supporters depending on the type of commitment. This diversity makes it possible to fund projects, build customer loyalty, and strengthen marketing.

Despite its benefits, crowdfunding also poses certain challenges. Financial risk, platform fees, and the need to gain the trust of many potential supporters are all aspects that need to be considered when setting up your campaign.

The success of a campaign depends on careful preparation, a compelling story, a strong marketing strategy, and clear communication. The combination of these factors can be critical to achieving your funding goals and making your project a success.

Frequently Asked Questions

How can I successfully launch a crowdfunding campaign?

To successfully launch a crowdfunding campaign, you must first develop a clear and appealing project idea. You should create a plan that includes your goals, target group, and communication strategy. A compelling video and a detailed description of your startup are also key to attracting supporters.

What types of crowdfunding are there?

There are four main types of crowdfunding: reward-based, donation-based, equity-based, and lending-based crowdfunding. Each type has specific characteristics that you should align with your plan and business goals before making a decision.

How do I choose the right crowdfunding platform?

Choosing the right platform is an important step and depends on several factors: the type of crowdfunding, the objectives, and the target audience of the product. It is also worth comparing the platform's fees, the user-friendliness of the website and the projects already offered on the platform.

What legal aspects do you need to consider when crowdfunding?

The legal aspects of crowdfunding include copyright, contract law, and tax regulations. In the case of equity-based crowdfunding, there are often financial market regulations to consider. It is generally advisable to seek legal advice before launching a campaign, especially for equity-based crowdfunding.

How important is community maintenance during your crowdfunding campaign?

Community maintenance is crucial to the success of a crowdfunding campaign. Regular updates, transparent communication, and the involvement of your supporters can create a positive dynamic and increase the reach of your campaign. Platforms often offer community maintenance support.

What factors influence the success of a crowdfunding campaign?

Important factors for the success of a crowdfunding campaign include a convincing concept, a strong presentation, the activity and size of your community as well as continuous engagement and updates during the campaign period. Transparent communication and a clear call to action are also key to success.