Alex Valley raised $1.1 million from an angel investor in 2020 to get Unity Wellness, his brand of CBD beverages and protein bars, off the ground.
When he started thinking about raising more money to grow the brand in 2022, Valley said he assumed venture capital was the next step. He did a series of interviews with a venture capital firm that seemed like a solid choice. Then, while taking a long weekend trip with friends, Valley started getting condescending messages from one of the founders of the fund.
That exchange put a sour taste in his mouth around the same time he was introduced to equity crowdfunding platform Wefunder. Unity Wellness had already built a deck and prepared its financials to pitch VC. Why not try crowdfunding? Valley created a video, launched a campaign, and raised $608,000 thanks to 80 funders—including their original angel investor, who chipped in for a second time.
Not only did the pivot to crowdfunding give Valley more control to make decisions for the health of the business, it also expanded Unity Wellness’ network of engaged customers. “How I see crowdfunding is a marketing campaign that ends up paying you,” he said.
But crowdfunding—and its upsides and drawbacks—aren’t quite that simple. There are several routes would-be crowdfunders can take, and all of them require serious commitment to be successful.
Here’s what we’ll cover in this story:
- Types of crowdfunding for startups
- Pros of crowdfunding for startup growth
- Cons of crowdfunding for your startup
- How to run a successful crowdfunding campaign
Types of crowdfunding for startups
Crowdfunding allows a business to raise money from the general public instead of only from accredited or high-net-worth investors. In some cases, crowdfunding dilutes the founder’s equity, but in other cases, it allows the founder to retain equity.
At the heart of crowdfunding is the democratization of access, allowing everyone to take part, rather than only a wealthy segment of investors.
“You are following this vision of allowing everyone to invest, not just the wealthy and privileged,” said Archil Cheishvili, CEO of Genesis AI, an artificial intelligence marketplace. “If you’re a believer in equality, that’s a big pro.” Cheishvili’s company has been raising money via Wefunder and Netcapital since 2018, and has completed several five- and six-figure equity crowdfunding campaigns.
But raising money through crowdfunding isn’t quick or easy. Read on for the pros and cons of each type and what it takes to run a campaign that achieves its goal.
Most people are familiar with this model, thanks in part to the rise of Kickstarter, which launched in 2009. People give money in exchange for a reward from a business or project, often a tangible product. Throughout the process, the founder or creator can foster an engaged audience without giving up equity.
“The benefit of rewards-based crowdfunding is that it is non-dilutive and the founders do not need to give up ownership in exchange for these funds,” said Jason Cherubini, a lecturer in business administration at Stevenson University in Maryland.
But it can be hard to raise a significant amount of funding with reward-based crowdfunding. “If a company is looking to raise through crowdfunding, the chances of them raising more than a couple hundred thousand is very low,” Cherubini said, noting that outliers in this regard usually have help from high-profile celebrities.
Popular reward-based crowdfunding platforms:
Kickstarter: Specializes in creative projects in 15 product categories. More than 230,000 projects have been successfully backed on the platform (about 40% of campaigns launched). Most successful projects raise less than $10,000, according to Kickstarter.
Indiegogo: Launched in 2008, this site serves as a crowdfunding platform and a product marketplace. Indiegogo InDemand allows projects to continue to raise funds even after a campaign has ended.
FundRazr: Founded in 2009 with a focus on purpose-driven projects, this platform allows you to access funds immediately or run a traditional, all-or-nothing campaign. It has hosted more than 105,000 campaigns.
Through equity-based crowdfunding, people give money in exchange for a slice of ownership in the business. It allows a startup to access a lot of funders at once, rather than doing outreach to target a few select angels or VCs.
Since 2016, non-accredited investors—people who aren’t ultra-wealthy and have government-set limits on how much they can invest annually—have been able to participate in equity crowdfunding because of changes in federal law. The practice has gained popularity quickly: Data from Florida Atlantic University shows that equity crowdfunding campaigns raised $465 million in 2021 alone.
There are two levels of equity-based crowdfunding, which are regulated by the Securities and Exchange Commission:
- Regulation CF: For raising up to $5 million in a 12-month period
- Regulation A: For raising up to up to $75 million in a 12-month period. It’s sometimes referred to as a “mini-IPO”
Some crowdfunding campaigns may offer funders common stock, while others might choose to offer a SAFE, which converts to stock if certain conditions are met later.
Popular equity crowdfunding platforms:
Wefunder: Launched in 2012, Wefunder was a major player lobbying Congress to allow equity crowdfunding. Platform users have raised more than $5 billion.
StartEngine: “Shark Tank” investor Kevin O’Leary is the face of StartEngine, which has helped users raise $650 million. The platform also gives companies the option to let backers trade shares after they fund a campaign.
Republic: Users can fund business campaigns through Republic, along with real estate and crypto projects.
Netcapital: This platform promotes its templates for startups, and has helped users raise more than $900 million. Netcapital went public in 2022.
Hubspot offers a list of more crowdfunding platforms. All funding portals must be registered with the federal SEC.
Other types of crowdfunding
There’s also loan-based crowdfunding, in which you borrow money from groups of individuals instead of from a financial institution.
One final type of crowdfunding: Donation based, where you ask for donations from individuals without the promise of a reward. Cherubini said this method isn’t used much.
Wondering if crowdfunding might be right for you and your startup? Read on for details on the pros and cons of this funding mechanism.
Pros of crowdfunding for startup growth
With the definition of crowdfunding expanded from the old-school reward-based option, startups can benefit from a variety of advantages of this funding avenue.
Though companies give up a portion of ownership through equity crowdfunding, they still maintain the ability to make decisions about business growth.
“We wanted to share ownership with regular people and not just people who had lots of money and lots of connections,” said Cheishvili of Genesis AI. He said that while venture capitalists often have short targets and a laser focus on revenue, crowdfunding can allow businesses to maintain their values and desired pace of growth rather than worrying about delivering to a VC with high demands.
“If you have the power, regardless of equity, you can make more unilateral decisions without looping in the whole team,” Valley of Unity Wellness said. But if you raise institutional money, he said, you likely have to deal with additional layers of decision-making or bureaucracy. “As an entrepreneur it’s so important to make decisions and make them quickly,” he said.
Build brand loyalty
Crowdfunding can draw in investors and real-life product users at the same time. And those investor-users are highly likely to spread the word about your brand. Even if they aren’t likely to earn a significant return on their contribution, these backers are likely driven by the prospect of joining a community of like-minded people.
Valley saw an opportunity to engage with would-be evangelists of his company’s functional beverages through crowdfunding. Unity Wellness developed tangible rewards to offer a little extra to its equity contributors, ranging from discount codes and brand swag (for $5,000 investments) to monthly team calls, party tickets and a pallet of drinks (for $100,000 investments).
While those rewards have a cost to produce, Valley said, it was important to reward people for their commitment to the company.
And he’s already seeing the benefit of having those contributors on board. “A lot of our investors on Wefunder are engaged, reaching out about stores that might be interested in their neighborhoods,” Valley said. “It’s been a great way to build those relationships.”
Stretch marketing dollars
Crowdfunding can provide a growing brand with a marketing focus before, during and after the campaign.
“I saw this as a marketing campaign,” Valley said of his 2022 raise. “As a bootstrapped startup, marketing dollars are tight. This gave us a way to blast [our name] all over” and attract those would-be brand loyalists, he said.
“More companies are doing crowdfunding simply for the marketing value,” said Jennifer Fortney, founder and president of Cascade Communications in Chicago. “They don’t care if they meet their [funding] objective, but they want to get in front of people and give a reason to market themselves.”
Cons of crowdfunding for your startup
The drawbacks of crowdfunding make it clear that although ways of raising business capital are changing, this method isn’t for everyone.
Stigma from venture capitalists
If you’re thinking about raising venture capital later, your crowdfunding history may be met with some resistence.
Some VCs and even some customers, Cheishvili warned, “will wonder why you’re crowdfunding … and assume you could not raise VC—that your company must be pretty bad.”
Valley agreed that the stigma against crowdfunding is still strong. “The wrong notion that most have is that crowdfunding cheapens your brand,” Valley said.
Though the crowdfunding stigma may be starting to fade for some sectors, you should be prepared to answer questions about why you chose crowdfunding over another form of raising capital.
Difficulty getting media attention
While startups could get press for their crowdfunding campaigns in the earliest days of the method, it’s harder now that it’s a common way to raise capital. “Journalists are saying, ‘call me back when you reach your goal,’” said Fortney.
But even a successful crowdfunding campaign may not be enough to garner interest. Fortney said that raises of $25 million and up tend to be most interesting to reporters, because those large raises can demonstrate the credibility and validity of the startup.
Scam artists and legitimate businesses that made big promises but couldn’t deliver have also dulled the shine on crowdfunding campaigns, she said. If you want to get eyes on your campaign, you’ll need to put in some work to show you’re a company that can be trusted.
Need for established network
Not only do you have to get people excited for your brand’s product when you crowdfund—you also need to bring your backers to the platform with you.
“If you’re a brand and you don’t already have established customers, it’s going to be a lot harder [to raise money],” Fortney said.
You’ll need to rely on every single customer, client and connection you’ve made if your campaign is going to succeed.
But that network also needs to understand why it’s worth contributing to your campaign beyond the financial potential. “Only a small percentage of them will actually go on to make significant returns,” Cherubini said. “Angel investors and VCs know this, so they diversify their investments across ten or twenty new ventures in the hope that one takes off and makes enough money to cover the other losses.”
But a regular citizen crowdfunding investor may not have the resources to diversify to that level. If they’re going to take a gamble on your project, you need to provide substantial motivation.
How to run a successful crowdfunding campaign
While building a successful crowdfunding campaign isn’t easy, it’s not impossible. These three tips can increase your chances of meeting your goal.
Spend time preparing
“It takes many hours, many weeks to run a successful campaign,” Cheishvili said.
Fortney recommends starting to plan your crowdfunding campaign three to six months before launching it. “A lot of that is building your network,” she said, including having a marketing plan with an email list set up.
And if you’re going the rewards crowdfunding route, she said to make sure you have production and manufacturing plans in place. “We live in an on-demand society,” Fortney said. If you get thousands of pre-orders for your product, you need a plan to deliver within the expected time frame.
Valley advised preparing a short video for your crowdfunding landing page, even if it isn’t required by the platform you choose. “A great video and a great deck—people will look through that.” While they will also examine your financials and other supplemental materials, “you have to capture their attention and captivate them in five minutes,” he said.
Valley also said that being organized goes a long way toward convincing potential investors that your business is run well. When he’s seen a campaign fail, it’s because “they don’t look organized, and it’s messy,” he said.
Activate your network
Valley said raising the first $50,000 through crowdfunding is the hardest part, because you need to build momentum before you’ll attract attention from strangers.
“You have to have a queue of people who are interested in putting money in, whether it’s friends or family,” Valley said.
Have those conversations with your closest supporters early before spreading the word via your established social media channels. “People invest based on hype and FOMO [fear of missing out],” Valley said. But you need a foundation before you can start building hype.
Think small to build buzz
While every business wants to be featured by a national publication, Fortney advises thinking local when promoting your crowdfunding campaign beyond your established network.
“Start in your hometown,” she said, by seeking press in local publications to generate interest. “Those people are going to care more about your success,” she said, especially if growing your business means you might hire people where your brand is based.
She also advises targeting industry specific news outlets instead of large publications like Wired, for instance. Or try trade magazines, newsletters for organizations you’re part of, or even your alma mater’s alumni publication. Once you get some buzz, then you can aim bigger.