Entrepreneurial Financing: The Role Of Community In Crowdfunding
Crowdfunding has been growing explosively, with transaction value in the Crowdfunding segment projected to reach $1,145.8 million in 2022. The average funding per campaign in this segment amounts to approximately $6,228. However, Crowdfunding is more than another way of raising capital. In connecting creators directly with customers, it empowers businesses to raise money for projects and causes that they are passionate about without the common barriers to financing that have been prevalent for minority and woman-owned business (M/WBE) owners.
Rather than relying on historically-biased bank loans or venture capital investment to develop offerings or drive demand for new innovations, creators can directly reach out to customers to refine ideas and determine interest. Crowdfunding acts as a platform, matching entrepreneurs with communities who need innovation, therefore reshaping which ideas come to market.
As we begin Financial Literacy Month, let’s explore the traditional barriers to financing, five types of Crowdfunding that can be used to raise capital for your business, role of the community in raising money, and tips for Crowdfunding success.
Exploring the Historical Barriers to Financing
There are specific barriers in financing that have, unfortunately, held back M/WBE businesses the most. In many cases, access to financing is one of the most evident and detrimental barriers for these entrepreneurs.
Black-owned businesses have long faced challenges in getting traditional financing, well before the pandemic became our “new normal.” According to a 2019 Small Business Credit Survey by the Federal Reserve Bank of Atlanta, only 31% of Black-owned businesses received all the funding they applied for, compared with 49% of white-owned businesses, 39% of Asian-owned firms, and 35% of Latino-owned businesses. Plus, 38% of Black-owned businesses did not receive any of the financings that they applied for, compared to only 20% of white-owned businesses! This is due to biased frameworks that exist within many banking institutions that favor white-owned businesses as they’re typically considered "less risky."
The initial round of PPP loans unfairly excluded America's most underrepresented businesses. A report on lending discrimination from the National Community Reinvestment Coalition found that Black-owned businesses seeking options and information regarding small business loans under programs like the Paycheck Protection Program (PPP) were treated differently than white-owned businesses. According to the study, lenders not only discouraged Black business owners from applying for a loan but encouraged white business owners in similar situations to apply for one or more loan products. This unconscious bias paints a clear picture of the stark disparity in experience when trying to access financing as a minority.
These are only a fraction of the studies that illustrate how M/WBE owners have historically had issues with securing funding and how that has become amplified amid the pressures that have presented themselves amid this pandemic. Consequently, many business owners have turned to the growing landscape of Crowdfunding sites to raise the capital to start a business, expand an existing business, or to simply sustain.
Five Types of Crowdfunding for Your Business
1. Donation-Based Crowdfunding
GoFundMe is the perfect example of a platform that uses donation-based Crowdfunding. This type of Crowdfunding is usually used by not-for-profit organizations seeking donations to raise funds for their causes. Most contributors who donate money through these platforms do not usually expect anything in return for contributing to a social cause or organization that they support. The return on investment (ROI) comes from the personal satisfaction of social good gained from contributing to a project.
This type of Crowdfunding is suitable for those financing charitable cases or supporting an individual or collective to impact a community.
2. Rewards-Based Crowdfunding
Kickstarter and Indiegogo are popular platforms that have become synonymous with rewards-based Crowdfunding. Through reward-based Crowdfunding, people can pledge money to innovation projects, new technology, or any other product or service. What makes it so effective is that donors who fundraise for projects on the platforms receive incentives or rewards when they donate to projects or companies.
While it is a straightforward user experience to post the baseline requirements of a project online, a lot of effort goes into community building before it can successfully gain funding. Therefore, this type of Crowdfunding is most suitable for those who are willing to commit the attention, planning, and execution to target marketing campaign efforts.
From steps like setting funding goals to coming up with a reward strategy, posting your campaign, using social media platforms, and delivering the rewards, your company needs to have a clear image of where you want your fundraising to lead.
3. Equity-Based Crowdfunding
AngelList, SeedInvest, and MicroVentures are a few notable platforms that use the equity-based Crowdfunding model. Equity crowd funders provide companies with working capital in exchange for a piece of the company. Equity Crowdfunding allows investors to participate in partial ownership of a company because they each individually get a stake in the company and a percentage of the profits.
This type of Crowdfunding can be beneficial to startups because it is a quick way to gain access to capital. However, this can get complicated when it comes to legal compliance. This is because it allows for a large community of equity investors to acquire a stake in your business. As a result, you may gain the capital required to excel while losing some decision-making power.
4. Debt-Based or Peer-to-Peer (P2P) Crowdfunding
DealMaker and Yieldstreet are two of the leading P2P lending alternative platforms. Debt-based Crowdfunding is a crowdfunding option that allows you to obtain high amounts of funding without needing to give away any equity in your business. In many cases, these campaigns seek hundreds of thousands of dollars. In exchange for pledging their money, investors require a binding agreement to repay the amount that they give you within a certain period of time. A debt-based Crowdfunding campaign typically lasts for four to five weeks.
Considering how difficult it is for M/WBE owners to qualify for a bank loan, this type of Crowdfunding is best suited for those who are seeking an alternative that allows you to market your funding campaign to individual investors (rather than relying on the hope that a banking institution finds your business worthy of support). This alternative often also has better interest rates, repayment terms, and conditions than traditional options in the market.
5. Subscription-Based Crowdfunding
Patreon is a self-declared subscription-based Crowdfunding platform as their platform allows creators to draw a steady, continuous income from their audiences. As of 2021, more than 250,000 creators have animated the Patreon platform, and close to six million monthly active patrons support creators financially. The 6 million patrons represent 11.37 million individual pledges of support. According to Patreon, creators make a combined total of more than $1 billion per year.
Patrons fund a creator’s creative process and access to the community, however, most creators on the platform earn less than $100 per month. Therefore, this type of crowdfunding is best suited as an opportunity to add a new channel to your marketing mix as opposed to seeking to use it as an integral source of funding for your business.
Understanding the Role of Community in Crowdfunding
Community plays an important role in raising money through Crowdfunding. The results of a study on the role of community administered by the Department of Management in the College of Business at Colorado State University suggested the need for further integration of community and cultural constructs into models of venture funding, as such variables may have more relevance than previously believed.
For example, Brandon Stanton is the world-renowned street photographer and storyteller behind Humans of New York (HONY). Since launching HONY 12 years ago, Brandon has pivoted his photography project into a one-man philanthropy hub that amplifies the voices of the most underrepresented members of our global community to over twenty million social media followers. In addition to sharing fascinating stories from over twenty different countries, he has integrated Crowdfunding into his brand in order to fundraise for some of the people he captures.
In the time since the 2016 study at Colorado State University study on “the role of community in Crowdfunding success,” the world has witnessed Brandon raise millions of dollars in donations via GoFundme campaigns. Plus, he has amassed over 16,518 Patreon patrons by consistently being ranked one of the most popular Patreon writers by patron count. Community has empowered Brandon to raise money for people he is passionate about, all while making a positive impact.
Tips for Crowdfunding Success
All roads to Crowdfunding success—with every approach and method—leads right to community. As such, here are a few tips for building a community around your brand.
1. Understand your brand’s mission, values and personality.
The first order of business is to understand that the foundation of Crowdfunding is about the brand. Having a clearly defined brand allows you to tell your story, control the narrative, earn trust and get prospective investors excited about the opportunity that you are presenting.
2. Create a community content hub.
What better way to build a community around your brand than to create a centralized, curated content hub that centers around your brand’s area of expertise? Benefits include creating a safe space that promotes community engagement, sharing content on an online property owned and controlled by your brand, driving leads, increasing authority as a credible resource, and strengthening your online presence as a whole.
3. Encourage user-generated content (UGC).
User-generated content (UGC) is any form of content that has been posted online by a user of a brand based on their distinct experiences, opinions, ideas, or feedback. When leveraged properly, UGC can further help you develop a community that strengthens your customer/brand relationship.
4. Include charitable calls to action.
Charitable giving to a cause aligned with your brand’s mission provides the immediate impact of providing funding, products, or services directly to underserved populations. Including charitable calls to action in your Crowdfunding efforts provides the “ripple effect” of using your brand equity to increase awareness of the featured organization and welcoming your community to make an impact with you.
5. Highlight relatable people.
Similar to the trailblazing example HONY illustrates, highlighting relatable people allows prospective investors to see the community through your brand. For many people who are underrepresented, portrayals of them in the media not only affect how others see them, it also affects how they see themselves.
Let’s keep your crowd at the forefront of Crowdfunding.
Want to learn more about social and capital resources? Check out this article on closing the funding gap!
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