• George Cook

Which Crowdfunding Tool is Right for Me?


Crowdfunding is fantastic tool for businesses looking to raise money to fund their ideas and grow. There are currently dozens of options on the market, it can be a daunting task to pick the right one. How can a business sift through the noise to find the option that is right for them? There are several factors to consider when making the decision to crowdfund.

Gift Crowdfunding (aka Reward Crowdfunding)

Most business owners are likely familiar with this crowdfunding option. Companies like Kickstarter and Indiegogo have been around for years and are a fantastic option for individuals looking to get their ideas off the ground. In exchange for money, businesses commit to “pay back” donors in the form of gifts, pre-orders, or some other non-monetary perk.

Pros:

  • Large, mature pool of donors eager to help great ideas

  • Limited cost (10% transaction fee + cost of investor repayment perks)

  • Very little paperwork

Cons:

  • Not appropriate for established, revenue generating businesses

  • Very low chance of payback for donors

  • Higher expenses than many businesses anticipate with closing costs and prepaid product

Works best for:

  • Someone with an idea that is trying to build a company

Equity Crowdfunding

The implementation of Regulation CF in 2016 marked the beginning of equity crowdfunding. Businesses can more easily sell ownership of their company in exchange for cash from the public.

Pros:

  • Gives early-stage businesses access to investment funds

  • Several reputable platform options

  • Aligns customers' incentives with the success of the business

Cons:

  • Gives away ownership and control of the company to the crowd

  • Only works for pre-venture capital, ultra-high growth businesses

  • Considerable paperwork and ongoing disclosure requirements

Works best for:

  • High growth technology startups

Debt Crowdfunding

Similar to Equity Crowdfunding, debt crowdfunding became an option for small businesses in 2016 with the introduction of Reg CF. Much like a traditional bank loan, businesses borrow money in the near-term in exchange for the promise to pay that money back in the future plus some interest.

Pros:

  • Businesses owners maintain full control/ownership of their business

  • Flexible terms and repayment options based on the business’s preferences

  • Limited ongoing disclosure requirements

Cons:

  • Requires businesses to have revenue to pay back the loan

Works best for:

  • Main Street storefront businesses with an engaged customer following

Christian Bilger is the COO of Honeycomb. Having witnessed the tremendous growth that financial innovation brought to mega-banks and hedge funds during his early career, Christian was determined to use these powers for good and help revitalize Main Street America. When not ensuring the smooth operation of Honeycomb’s well-oiled machinery, Christian tours and samples Pittsburgh’s many great breweries and restaurants with his wife, Alina.


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