Crowdfunding is an alternative method of financing in which a large number of people collectively fund a project, product or start-up, usually by contributing small sums of money. Funding is generally raised via online platforms where companies present their projects and attract supporters.
For start-ups, this form of funding offers the opportunity to raise capital, gauge initial demand and build a community. Depending on the model, supporters receive various rewards in return.
What types of crowdfunding are there?
There are four basic models, which differ in particular with regard to the consideration:
- Reward-based crowdfunding: Backers receive a non-financial reward, such as a product, a pre-order or a special reward.
- Equity-based crowdfunding: Investors invest in a company and receive a financial stake in it. Depending on the arrangement, this may take the form of, for example, shares in the company or other equity instruments.
- Donation-based crowdfunding: People support a project through donations without expecting anything in return, either financially or in kind.
- Lending-based crowdfunding: Many investors provide a company with capital in the form of loans, which are to be repaid in accordance with the agreed terms.
The participation-based model, in particular, is often described as Crowdinvesting is referred to as. The specific terms of the contract and potential risks of loss are decisive in this regard.
How does a crowdfunding campaign work?
Start-ups can raise capital for a specific project via a suitable platform. To do so, they usually set a funding target and a campaign period.
A typical procedure consists of the following steps:
- Preparing the project: Define the amount of funding, the target group and the intended use of the capital.
- Select a financing model: Identify a suitable platform and potential benefits.
- Create a campaign: Explain the project in a clear and understandable way and, where appropriate, present images, videos or prototypes.
- Attracting supporters: Raise awareness of the project through marketing, social media and your own community.
- Arrange financing: Receive funds in accordance with the platform’s terms and conditions and fulfil the agreed obligations.
Some platforms only pay out the money once the funding target has been reached. Others also allow for the payment of a smaller sum. The exact terms and conditions depend on the provider in question.
Example: Crowdfunding for a start-up
A start-up is developing a sustainable hardware product and needs 50,000 euros for its first production run.
The team is showcasing its product via an online platform and offering supporters the chance to pre-order it.
If the pre-orders reach the funding target, the start-up can prepare for production. At the same time, the team receives initial feedback on demand, price and desired product features.
However, the company must also ensure that it is actually able to manufacture and deliver the products ordered.
What are the advantages of crowdfunding?
For start-ups, this form of financing can offer a number of advantages:
- Access to capital: Explore funding options to complement those offered by banks or traditional investors
- Market validation: Gain initial indications of actual demand and willingness to pay
- Community building: Involve supporters and potential customers at an early stage
- Marketing and visibility: Generating interest in new products or services
- Direct feedback: Gather feedback for further product development
A successful campaign can also demonstrate initial market traction. However, it is no substitute for a comprehensive review of the business model.
What are the risks and challenges?
Not every campaign reaches its funding target. Furthermore, the preparation often requires a great deal of time for marketing, communication and the creation of compelling content.
Start-ups should also take platform fees, production costs and promised benefits into account at an early stage.
In the case of pre-orders, delivery delays or unexpected production costs can prove particularly problematic. Equity- and loan-based models, on the other hand, entail additional financial and legal obligations.
In the European Union, specific regulatory requirements apply to certain investment- and loan-based crowdfunding services. Further information is available from the European Commission on crowdfunding.
Which start-ups is crowdfunding suitable for?
This funding is particularly suitable for projects that can be presented in a clear and accessible manner and that are aimed at a clearly defined target group.
In the case of physical products, pre-orders can, for example, help to finance an initial production run. Creative and social projects are also often well-suited to such campaigns.
For B2B start-ups with complex software solutions or long sales cycles, however, building up a large base of supporters can be more difficult. In such cases, other funding options may be more suitable.
You can find an overview of alternative funding and support options at the Fundraising opportunities offered by innoWerft.
How can innoWerft help with this?
innoWerft supports founders in assessing business models and market potential, as well as in developing suitable funding strategies. Through coaching and feedback, start-ups can refine their funding plans and prepare for meetings with potential investors.
Frequently asked questions about crowdfunding
What does ‘crowdfunding’ mean in German?
The term is often referred to as crowdfunding. This involves a large number of people pooling their funds to provide capital for a project or business.
What is the difference between crowdfunding and crowdinvesting?
Crowdfunding is the umbrella term for various funding models. Crowdinvesting focuses on financial investment, whilst other models are based, for example, on donations or pre-orders.
Do start-ups have to pay back the money they have raised?
That depends on the funding model. In the case of donations and traditional pre-orders, there is generally no obligation to repay a loan. In loan-based models, on the other hand, repayment is agreed.
Is crowdfunding also suitable for B2B start-ups?
Yes, although its suitability depends heavily on the business model. It can be particularly difficult to attract enough supporters through a public campaign when dealing with technologies that require explanation or specialised business clients.
innoWerft is an early-stage investor and accelerator based in Walldorf, supporting start-ups before or shortly after they are founded by providing capital, coaching and access to a network of investors and businesses to foster sustainable growth.
Would you like to take your start-up to the next level and find out more about innoWerft? Apply now for the Open Pitch.