Explanation: Nowadays, it is hard to imagine that crowdfunding once didn’t exist. With crowdfunding, the “crowd” finances the funding need of a company. Usually, crowdfunding is performed via an online platform where entrepreneurs offer investment opportunities on one side of the platform and on the other side of the platform, a large group of people invest small amounts to meet the entrepreneur’s investment need.
When to choose this source of financing: In general, there are three types of crowdfunding: loans, pre-orders/donations and convertible loans. Are you looking for a loan, but having trouble securing one from the bank because your risk profile is too high? Then try loan crowdfunding. Do you have a prototype available, and do you want to test the product/market fit, but you cannot finance the production/delivery of the first batch of actual products? Then go for pre-orders/donations. Well-known examples of platforms offering these types of crowdfunding are Kickstarter and Indiegogo. They are mainly suitable for products, projects or gadgets aimed at the consumer market and have a strong design element to them.
Convertible loans have the following advantages: 1) no shares are being issued, 2) valuation discussions are postponed until the moment the value of a company can be better determined and 3) it is an easier, faster and cheaper process than an actual share transfer.
Since the people that invest via crowdfunding platforms are not always professional investors, crowdfunding is better suited for propositions that are not too complex or technical and that are easily understood by the general public (that’s why it’s called “crowd” funding). Think, for example, of consumer products.
There are also crowdfunding platforms with a specific focus, so take that into account when making your choice. As an example, Dutch crowdfunding platform Oneplanetcrowd focuses specifically on sustainable projects with a positive impact.