Raising Capital for Startups: Crowdfunding, Venture Capital, Angels, or Bank Loans

A CBInsights study found that 38% of failed businesses cited running out of cash as one of the primary reasons behind their failure, so finding financing for your company is critical. But as a business owner, how do you know which way of raising capital is the best for you? Going over all the different options can get overwhelming, but it’s not a part of starting your business that you can ignore. This post will go over the most popular funding methods and hopefully get you closer to the various funding options available to you.

Angel Investing

Angel seed funding occurs in the earlier stages of developing your business. Angel investors are individuals or a network of individuals who believe in a company’s mission and potential for success. They usually have an interest in or experience in your business’s industry. These investors tend to be hands-on and provide valuable guidance for these young businesses. They often take equity or convertible debt in return for their investments. This funding is suitable for businesses that are very early in the process and haven’t quite worked out all of the kinks.

Venture Capital

In addition to providing startups with funding, venture capital (VC) firms also provide guidance and connections. VC firms are usually looking for businesses that are further along in a product development process compared to angel investors. VCs are looking to invest in companies with high growth potential and evidence to support their ideas and viability. Because of this, it is harder to get VC funding, but the investments they end up making are typically more substantial. Business owners will need to weigh the benefits of this method against losing some ownership and potentially control of the company.

Bank Loans

Bank loans are the most traditional way of funding your startup, but getting bank business loans is not easy.
To help new businesses with the process of obtaining loans, the Small Business Administration (SBA) has created SBA-backed loans that you can get through your local lender. Since the United States government backs SBA loans, they reduce the risk to the lender and are more accessible for small businesses to obtain. Still, to get an SBA loan for your business, your company will need accurate information, documentation, a strong business plan, including the vast expertise in your industry, and a solid financial history. The type of SBA loan you apply for will determine how much funding you receive. Some are capped at $50,000, while others can go up to $5 million.

Crowdfunding

Crowdfunding is a way of raising money for your startup by creating a campaign and putting it on one of the many crowdfunding sites. This form of funding involves getting funding from a crowd of contributors rather than a single investor or firm. Finding the best crowdfunding platform for your business is essential, as different sites have different niches, formats, and applications. The crowdfunding concept helps raise capital and helps promote the business’s products or services and build a brand. However, for people to buy in and give their money, you need to have an engaging story for them to get behind. Below are the several types of crowdfunding which you will need to be aware of before moving forward with your promotion:

Equity Crowdfunding

Equity crowdfunding allows startups to give out a portion of their company as an incentive for funding from investors. With equity crowdfunding, businesses sell a share of their company to investors; this type of crowdfunding is typically best for companies that can grow and scale quickly. The number of shares of the business that the investor receives depends on the size of their investment. Not all crowdfunding campaigns allow this type, and a couple of good examples of “Equity Crowdfunding” are SeedInvest, MicroVentures, Crowdfunder, StartEngine, or WeFunder.

Rewards Crowdfunding

Rewards crowdfunding, such as Kickstarter, Indiegogo, and Patreon, work in a way that donors get something in return for their donations. By offering backers a reward, you can avoid paying debt or giving up equity in your company. Rewards crowdfunding is best for businesses with a product they can ship and or need funding before generating revenues. The reward will depend on the size of their investment, which helps to facilitate more significant contributions. Rewards vary from free t-shirts to getting the product at a discounted rate. This type of crowdfunding is best for businesses focused on making products for consumers like games, art, tech, music, and food shipped directly to campaign backers. Competition can be brutal, and a good approach is to raise smaller funding amounts, as 82% of Kickstarter or Indigogo campaigns raised less than $20,000. Patreon is best for creative content providers, like podcasts, artists, music instruction YouTubers, and other entertainers, posting new content regularly, which is especially valuable if your content is typically free. Your approach is to let people support it or offer additional content behind a paywall.

Donation Crowdfunding

GoFundMe is an example of a “donation” crowdfunding, allowing businesses and individuals in need to create campaigns and receive contributions with nothing in return to the donor. These individuals may believe in the company, industry, or the particular purpose of the offering and want to support it. Donation Crowdfunding works well for businesses that can gather supporters to fund their campaign, even though there will be no repayment. Although this may not be an excellent option for startups, the companies in distress, struggling to keep the lights on while playing a vital role in their communities, often raise funds successfully.

Debt Crowdfunding

Debt Crowdfunding such as LendingClub, Prosper, Funding Circle, or Kiva are all fantastic debt crowdfunding options if you need capital quickly and actually can qualify. You will need to be in business for at least 12 months, have good personal credit of at least 700 or more, and have at least $50,000 in annual sales. However, these qualifications are not so difficult to meet for small startups and certainly for more established businesses. For this type of crowdfunding, the money that contributors give is a loan and is expected to be repaid with interest within a certain amount of time. A viable option may be Kiva, especially for smaller operations that need an interest-free microloan up to $10,000. You don’t need to have a credit score to access Kiva, and its representatives will work with you to set up a campaign and craft a message for its users.

Benefits

Raising capital via crowdfunding comes with many benefits, but the biggest is the ability to build social proof and gain a loyal customer base. It is an excellent way of validating that your business has merit before investing heavily in it. In addition, once the first people buy in and believe in your business, it is easier to get more people on board. It’s beneficial if you are looking to try and get venture capital funding down the road, as they need proof of concept. Crowdfunding also provides a great way to get new ideas for your business or improve those you already have. When you first put the idea out there, it is likely not perfect, but having public feedback can help give you ideas for how to improve. Crowdfunding offers all of these benefits while also allowing you to keep control of the decisions for your business.

Drawbacks

Crowdfunding comes with many benefits, but it is not without its drawbacks. Many of these drawbacks relate to the performance of your campaign. If your offering locks marketing and the idea is not convincing, the campaign may fail. A failed crowdfunding promotion can be detrimental to your business’s reputation and your employee’s morale. What’s worse is if it makes you think your idea was without merit, but the problem was your marketing. It makes it easy to give up on an idea with potential but wasn’t well demonstrated. Another drawback is that you risk your idea being stolen and copied if you don’t have the proper legal protection, such as a patent or copyright. It is crucial to find the best crowdfunding platform for your business. Otherwise, you may not reach your target audience.

Best for These Businesses

While there are niche crowdfunding platforms for almost every business you can imagine, there are businesses that are more suited to crowdfunding campaigns. Particularly companies or inventors with customer-facing products and/or World Changing Initiatives such as:

• Tech gadgets
• Green/Clean Energy Technologies
• Unique or quirky inventions
• Kitchen tools

What makes these all so perfect for crowdfunding is that they directly impact the lives of potential donors. It is much harder to get someone excited if it’s not something unfamiliar to them, and perhaps you’re solving a problem that they experience in their everyday lives even better.

Work With Us and Begin Raising Capital Today!

Making an informed decision about what method you should use to raise capital for your startup is incredibly important, but it doesn’t have to be overwhelming. Our team at IMMIX Productions, Inc. has 20+ years of experience in advertising, marketing, and creative development specifically related to crowdfunding, the knowledge that we can put to work for you. We will help develop a strong branding campaign and keep it consistent across all promotional materials. It helps make everything cohesive and get people to buy into your mission and brand. Working with us will also allow you less stress and more time to focus on other things in your business.

Below are a few projects intended for crowdfunding purposes:

– HyperSciences, Equity Crowdfunding promotion video for SeedInvest Capital Raise Campaign;
– MugDiet, the world’s first custom-fit portion control measure, where we developed the application and animation used in the Kickstarter campaign;
– Giddy: Breakthrough Wearable ED Treatment animation intended for Indiegogo – Crowdfunding Campaign.

Please check out our 3D Animation DEMO REEL or visit our website for other samples, case studies, and success stories.