Crowdfunding is where people help people for some kind of reward, such as products, benefits, interest or shares. It’s different to the donation appeals you hear about in the news – that’s pure donation and is usually about helping good causes and people who are in trouble.

The concept behind crowdfunding is when lots of individuals contribute small amounts of money to make a business venture or idea happen. There are three main types of crowdfunding to look into – rewards-based crowdfunding, equity crowdfunding and peer-to-peer lending.

How does rewards-based crowdfunding work?

This type of crowdfunding encourages people to give you an online contribution in exchange for some kind of reward. For example, if you want to launch a new brand of active wear for cyclists, you could offer a package of your products or a discount in return for investment. By creating several benefit tiers, each linked to a different contribution value, you can allow more people to help you out. If your business idea revolves around a service, you could reward investors with free-of-charge or discounted access to your service.

There are many rewards crowdfunding platforms out there. Some are suited to traditional business models and others are suitable for creative endeavours. Probably the best-known platform for small business is Kickstarter. Others include Pozible, PledgeMe and Indiegogo.

If your business is based on creativity of some kind, Patreon is a popular platform. Those who value your product can support your work with a monthly membership. You can reward them with special treatment, extra products or some other kind of benefit.

Benefits of rewards crowdfunding:

  • You keep full ownership of your business.
  • Investors could become evangelists for your products or service, so you get a bunch of honorary sales people to help you along.
  • It’s also possible your investors will become long-term customers.
  • You can test product/service ideas on your investors.

How does equity-based crowdfunding work?

This is the small business equivalent of listing on the stock exchange. It lets you offer shares in your company in exchange for funding. These are unlisted shares, because they aren’t bought or sold on a public share market. There will be legal paperwork involved, so expect some homework before you go out with your offer. For example, you’ll need to complete some kind of legal agreement which provides detailed terms of the investment to all committed investors.

If you don’t want to offer investors shares in your company, you can offer them something called a ‘convertible note’. In the future, this note can be converted to real shares.

Popular equity-based crowdfunding platforms include PledgeMe, Snowball Effect and Equitise. Be sure to read all the fine print on their sites before stepping in. Because large sums of money can be involved, equity crowdfunding platforms are registered with and regulated by the FMA (Financial Markets Authority).

Benefits of equity-based crowdfunding:

  • You can raise larger amounts of money that you’d typically get through a rewards-based offer.
  • You can pitch to a lot of potential investors at once, which is more time-efficient.
  • You’re still in control of your company, even though you’re sharing it with others.
  • Investors may become customers, helping to grow your customer base.
  • You don’t have to pay the money back.

How does peer-to-peer lending work?

Peer-to-peer lending is about people lending to people, rather than banks and financial companies lending to people. Also known as P2P lending, social lending and crowd lending,  deals are done through an online platform that connects borrowers directly to lenders. There will be interest charged and the amount of interest you’ll pay can depend on your creditworthiness.

In New Zealand there are several peer-to-peer lenders. For example, Squirrel, Zagga, Harmoney, PledgeMe and Lending Crowd.

Benefits of P2P lending:

  • You don’t need to apply for a loan through a bank or finance company.
  • You might pay a lower interest rate.
  • It all happens online, which is quick and convenient.
  • You can use the money for anything you like, however you will need to pay it back.

What about angel investors?

Angel investors are wealthy investors who provide financial backing for start-ups and entrepreneurs they believe in. They’ll usually want some equity in your company. The financial injection you get from an angel investor could be the only funding you need.

Typically, angel investors support innovative products and services that have excellent potential for success or could make a positive difference in the world. You might even get some mentoring from an angel investor, if they have significant business experience. Finding an angel investor could be as simple as searching on the internet. As with the other forms of funding discussed above, you’ll need to have a great pitch document ready.

Making sure your pitch is perfect

If you decide to have a crack at raising money for your venture through any kind of crowdfunding, you need to create a convincing pitch using words, images and videos. Your offer needs to capture the audience’s attention, highlight why your business or idea could be a winner, and then convince them to get on board.

To get your pitch perfect, you might want to enlist some help from a professional. For example, a marketer, copywriter or videographer. If you don’t want to spend anything on perfecting your pitch, see if you can get some free help from a friend or family member who knows about selling. You can also study the pitches of other companies on platforms like Kickstarter. It’s easy to see who’s successful by whether they’re achieved or surpassed their finance goals.