The New Jersey Institute of Technology recently published an infographic outlining how crowdfunding has grown over the years to become a popular alternative method for start-ups to acquire financing.
“In 2014, 34% of small businesses were unable to get adequate capital to expand or grow. Start-ups normally get funding from venture capitalists, bank loans, credit cards, friends and family, investors, and personal savings. Over the last couple of years, however, start-ups have been seeking more funding than ever before through crowdfunding.”
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This infographic introduces several topics which I’ll go over briefly, from the conditions which brought about the need for crowdfunding, to a look at some of today’s most successful platforms and projects:
Sources of Funds over the Years
From 2006 to 2014 the top three sources of funding for startups were:
1. Personal Savings (from 73% in 2006 to 77% in 2014)
2. Financial Institution (from 37% in 2006 to 41% in 2014)
3. Family and Friends (from 24% in 2006 to 33% in 2014) Reliance on each of these sources of funding has grown in the past eight years. Meanwhile, the percentage of startups turning to crowdfunding has remained the same – 3%.
Angel Investors and Venture Capital Firms
In 2013, start-ups acquired $24.8 billion in funding from angel investors. Most start-ups seek funding from angel investors during their early stages of growth.
When looking for this type of funding it is important to remember that angel investors usually expect a 20% to 25% return on investment, and they can be very exclusive and selective when making investments. Venture capital firms are another source of funding familiar to growing startups.
In 2014, seed stage businesses raised $718.8 million from venture capital investment (down from $1.6 billion in 2010). Early-stage, high potential start-ups are those who typically seek out funds from venture capital firms, typically after an initial seed funding round.
Alternative Finance Options Product Presales
Through platforms like Kickstarter, product or project oriented start-ups can raise funding by pre-selling a new product to an interested audience in order to start bringing in customers and an initial revenue stream.
Equity Crowdfunding
Equity crowdfunding platforms allow people to invest in unlisted companies in exchange for shares. They are a great solution for for startups looking to raise capital from many different investors.
Peer-to-peer lending
The infographic notes that, “US businesses borrowed an estimated $75 million through P2P lending platforms in 2014.”
Platforms like Prosper and Lending Club connect borrowers and lenders, helping start-ups access funding and cutting out the middle-man associated with traditional funding methods. You can learn more about P2P lending here.
Crowdfunding Growth Rate
Although some platforms were launched earlier, crowdfunding emerged as a major source of funding in 2009 and has since seen steady growth.
In 2009, start-ups used crowdfunding to raise a total of $530 million. In 2014 that number was up to $10 billion! And it seems like that number is going to continue to skyrocket – the global crowdfunding market forecast by 2025 is $300 billion.
Fastest Growing Crowdfunding Sites
As of 2014, the top 4 fastest growing crowdfunding sites are as follows:
1. Kickstarter – founded in April, 2009 with over $1.6 billion raised. The most successful Kickstarter project to date was The Coolest Cooler, a portable cooler with a built-in ice crusher, Bluetooth speaker and USB charger. In 2014, this campaign had a goal of $50 thousand and ended up raising more than $13 million from over 62 thousand backers.
2. Crowdfunder – founded in December, 2011 with over $196 billion raised.
3. Fundable – founded in May, 2012 with over $154 million raised. The most successful campaign on Fundable was Bitvore, a data visualization software for business. This project raised a total of $4,500,000 in 2014, with an original goal of $2 million.
4. Indiegogo – founded in January 2008 with over $99 million raised. An Hour of Code for Every Student is Indiegogo’s most successful project. Hour of Code, launched in 2014, aims to offer computer science training for teachers and raised over $5 million from more than 2,000 backers.
Tactics from Successful Campaigns
1. Set a reasonable financial goal – The team at the New Jersey Institute of Technology reminds us of Canary, an Indiegogo campaign, who set a modest $100,000 goal for their smart home security device which ended up raising over $1.9 million. Backers want to support projects that will be successful; setting a low but realistic goal (that will be enough to complete your project comfortably) can get you fully funded faster, drawing more attention to your campaign and ultimately getting you more pledges.
2. Reach out to potential investors before your campaign starts via social media, email, etc. – Some of the most successful campaigns in crowdfunding history were funded in a number of hours. This is because the creators behind those campaigns were well-prepared. They reached out to their target audience ahead of time and made sure that people were ready to show their support once the campaign was live.
3. Offer adequate not but excessive levels of rewards – When you are putting your rewards together, remember that it’s not good to have too many or too little. You want potential backers to have options to choose from without it being a complicated or difficult decision. The Coolest Cooler, for example, offered 11 different reward tiers on Kickstarter.
Conclusion
With a growing number of start-ups reporting difficulty raising the funds needed to grow their business, crowdfunding is presenting itself as a low-risk option that can lead to great things. Popular crowdfunding platforms are currently raking in millions in pledges per year as more people embrace this new way of supporting innovation and entrepreneurship.
Be sure to check out the full New Jersey Institute of Technology infographic here for even more stats and information on top crowdfunding platforms. For more in-depth statistics, check out the 2015 Crowdfunding Industry Report here.
