You might have heard that ‘the crowd is a good source of funding’ for your business or organisation.
What does that mean? What are they talking about?
The last two decades have seen the rise of ‘crowd sourced funding’ options, where founders and business operators are using (largely) online tools to gather together smaller financial contributions for a large number of people to meet their capital needs. This crowd sourced approach contrasts to a more traditional route of getting business finance from a single source (i.e. a bank or credit union or family member).
In Australia, crowd sourced funding has a particular meaning, referring to a regulated market where businesses can raise equity from a crowd. The more generic term in Australia is ‘crowdfunding’.
If we use the term ‘crowdfunding’ to describe this general activity, then there are 4 different types of crowdfunding that you could opt to use for your idea or business:
1. Donation-based crowdfunding
In this version, you are asking a crowd of people to donate to your business to achieve certain things. Typically, your ask is about achieving something good for the world or your community. What you are asking for generally doesn’t deliver personal benefit or financial benefit to your business.
In Australia, some websites that offer donation-based crowdfunding include:
2. Rewards-based crowdfunding
In this version, you are offering a crowd ‘rewards’ for giving your business money. The rewards might be lapel pins, tee-shirts, special tickets to events, or the like. Often these types of rewards are tied to more ‘donation’ like, feel good campaigns, where the value of the reward is not equal to the amount provided, but can motivate people to contribute where a straight donation is not as attractive.
The rewards might also be early access to a product before anyone else. This latter example is very good for businesses that make products that are in an early stage, where they are essentially pre-selling the product to customers before they are available. Businesses will often use this type of rewards-based crowdfunding if they have an early prototype, the costs of production and shipment are too high to cover upfront, or they are looking to validate whether customers want the product.
In Australia, some websites that offer rewards-based crowdfunding include:
3. Equity-based crowdfunding
This form of crowdfunding is relatively new in Australia. It’s an option available to businesses that are for-profit and have shares that they can sell to a crowd of investors. This option is quite sophisticated and the government has a lot of rules about how it works. This form of crowdfunding does enable you to raise up to $5m. It’s a good tool for businesses with high growth potential and a lot of customer and community support.
In Australia, some websites that offer equity-based crowdfunding include:
4. Debt-based crowdfunding
In this form of crowdfunding, your business asks a crowd of people for money with the promise that you will pay that amount back with interest over an agreed timeframe. Debt-based crowdfunding is under-utilised in Australia. Similar to equity-based crowdfunding, this model can work well for businesses with a strong customer base or community support. Debt is a good tool for working capital, purchasing inventory or equipment where the purchase increases revenue opportunities, and other growth opportunities. It’s use can be highly targeted, flexible and variable in size.
Australian options for debt-based crowdfunding are limited, but some (global) options include:
You might end up using two or more of these at different times over the life of your business!
If you’d like to explore more about your specific situation and which option would be best for you, you can book a workshop with us to explore.
For more free information, see the following links:
* Sources of funding for your business – https://business.vic.gov.au/business-information/finance/raise-capital/sources-of-finance
* Crowdfunding – https://business.gov.au/finance/funding/crowdfunding#:~:text=Crowdfunding%20is%20a%20way%20to,a%20campaign)%20on%20the%20website.