Crowdfunding to start a business involves raising small amounts of money from a large group of people to help finance your venture. These individuals usually pledge a certain amount to your idea in return for a reward for their contribution.
In this post, we take you through the benefits and risks of crowdfunding for startups and look at what you need to know to get started.
TYPES OF CROWDFUNDING FOR BUSINESS
There are two types of crowdfunding available in Australia, and the type you use will depend on your project and goals. These types are:
1. Crowdfunding, where supporters receive a gift or product in exchange for their pledge. This is commonly used to fund projects or products, as well as crowdfunding for charity.
2. Crowd-sourced funding (CSF), either in the form of debt crowdfunding or crowdfunding for equity. With debt crowdfunding, you take a loan and pay it back. Meanwhile, crowdfunding with equity means you offer a portion of your company in exchange for funds. This is commonly used to fund a new business venture.
ADVANTAGES OF CROWDFUNDING AND CSF
Crowdfunding can be an attractive option if you want to fund your business without going through bank loans or venture capital firms. This is because:
- There’s little upfront cost.
- You can test the waters to see if your idea gets traction with the crowdfunding community.
- It helps you improve your product. Your supporters can provide you with essential feedback to make your concept stronger for the future.
RISKS OF CROWDFUNDING AND CSF
While crowdfunding startups is a great way to raise money, it can also be a risky endeavour. Some of the disadvantages of crowdfunding are:
- You may not reach your campaign goals in time, and need to find alternative sources of funding within a short timeframe.
- If you choose to go with a crowdfunding equity platform, you’re partially surrendering ownership to your company.
- If you aren’t aware of the laws and frameworks for crowdfunding in Australia, you may accidentally breach the law.
- Crowdfunding provides a short-term injection of cash, rather than sustained income to your business over time.
- There are fees involved in crowdfunding, including payment processing charges and platform fees.
IMPORTANT POINTS TO KEEP IN MIND FOR CROWDFUNDING
CHOOSE THE RIGHT CROWDFUNDING WEBSITE
One of the most important decisions you will make is which crowdfunding website to use. The most popular reward crowdfunding websites are Indiegogo, Kickstarter, Pozible and Birchal. On these platforms, you set up a campaign funding goal and time period, then users can pledge funds to you.
If you’re looking for CSF options, the most widely used are VentureCrowd, Equitise, OnMarket and Birchal.
Regardless of which you choose, it’s important to double check they hold an Australian Financial Services (AFS) license to avoid crowdfunding scams.
This is a licence that proves the company is authorised to run a financial services business in Australia.
FEES ASSOCIATED WITH CROWDFUNDING
While each platform has different fees associated with funding, they generally include a payment processing fee and a funding fee. For example, Kickstarter and Indiegogo take a 5% fee for each campaign. Meanwhile, equity and debt CSF platforms normally take a campaign fee and a percentage of capital raised.
LEGAL ISSUES WITH CROWDFUNDING
In 2017, the Australian Government introduced the Corporations Amendment (Crowd‑sourced Funding) Act 2017.
The Act includes key legislative changes to protect companies and investors, such as:
- All CSF website operators are required to have an AFS licence.
- CSF is available to unlisted public companies with less than $25 million in assets and annual turnover.
- Companies need to register as an Australian company with the Australian Securities and Investments Commission (ASIC) before they can use CSF.
