What is Crowdfunding, Anyway?
If you’ve spent time on our website, you’ve probably heard us talk about crowdfunding quite a bit - but maybe you’re still wondering what it is, where it came from, and how it might be able to help you and your business. Read on to find out more about the wonderful world of crowdfunding!
What is crowdfunding?
To put it simply, crowdfunding is when many people come together and contribute small amounts of money for a single cause or business. There are different types of crowdfunding all over the place - maybe you’ve participated in a charity race where you raised money for a cause from your peers, or heard a public radio station running a pledge drive.
However, when we talk about crowdfunding, we’re usually talking about a few specific portals online that help facilitate the collection and transfer of funds from “the crowd” to whoever the money is meant for. Plus, these platforms and the way they work are all quite different from each other, so let’s break it down a little bit more.
Gift and Reward Crowdfunding
If you’re familiar with online crowdfunding in any way, it’s probably because you saw a GoFundMe or a Kickstarter campaign appear on your social media feed at some point. In recent years, these have become incredibly popular for people to fund various initiatives - from business to volunteer work to paying for emergency expenses.
GoFundMe is what’s known as a gift crowdfunding portal. These are crowdfunding platforms where people can raise money with no intention of giving back the money to the people who donate to them. You often see people run campaigns on GoFundMe for things like paying for expenses after a tragedy like a natural disaster, or to help sponsor someone’s volunteer trip somewhere.
Kickstarter, on the other hand, is a rewards crowdfunding portal. Like gift crowdfunding, reward crowdfunding does not have the expectation of paying back any of the money it collects. However, it gives people the option of offering rewards, or perks, for donating at certain levels. You may have seen a Kickstarter for something like a startup bakery, where if you donate $100 you get a free t-shirt, and for $500 you get something like free pastries for a year. This crowdfunding type is popular with very, very early stage small businesses as well as larger companies that are trying to launch new products.
However, since 2016 with the passing of the JOBS (Jumpstart Our Business Startups) act, a new type of crowdfunding has emerged: Regulation Crowdfunding. Unlike the previous two, Regulation Crowdfunding allows individuals to invest in businesses and for those businesses to pay them back - often with interest or equity.
Regulation Crowdfunding is in fact regulated by the Securities and Exchange Commission (SEC). This means that Regulation Crowdfunding platforms must vet the businesses they put on their platform to make sure they don’t pose a certain amount of risk to investors.
There are a couple of different types of Regulation Crowdfunding, but the most prominent are debt and equity crowdfunding. Honeycomb is a debt crowdfunding platform - we allow small business owners to take out loans from their community by raising funds from their customers and community that they then pay back with interest.
The other main type of regulation crowdfunding is equity crowdfunding - and it’s what it sounds like. It allows investors to buy very small parts of a business with the hopes that if it sells they can profit from the part that they own.
Where did crowdfunding come from?
As mentioned before, the concept of crowdfunding has been around for a while. Lots of big projects have been funded by crowds - from cathedrals to the Statue of Liberty. There are also many smaller versions of microfinance that are similar to crowdfunding, such as susu, which are revolving loan funds or credit associations in Africa.
The internet has allowed what we think of as crowdfunding today to proliferate. It’s commonly thought that the first online crowdfunding campaign was run by a rock band in the UK that looked to their email list to fund their tour in 1997. This then sparked platforms like ArtistShare, the first crowdfunding platform, to launch in 2000.
By 2009, Kickstarter was launched, and became an industry leader of reward crowdfunding. The 2010s were mostly dominated by gift and reward platforms, until 2017 when Regulation Crowdfunding was made legal by the JOBS Act. This piece of legislation essentially loosened regulations around businesses looking to raise money. It made it possible for non-accredited investors to invest in businesses, and it made it easier for small businesses to raise capital through investors.
Now, Regulation Crowdfunding is growing steadily as small businesses are seeking alternative ways to finance their growth that aren’t loans from a bank or handouts from their community.
What difference is crowdfunding making for small businesses?
We’ve seen first-hand how crowdfunding is helping small business owners achieve their dreams - even if they were denied by banks for a loan, or were struggling under high-interest debt from merchant cash advances.
Darren Carter, owner of Carter’s BBQ in Cleveland, was one such entrepreneur. “I couldn't get a loan from a local bank, and when I met with Honeycomb, I told them, ‘Look, I don't want to go through this process if I'm going to be denied again.’” he says. “Honeycomb ran the numbers, saw the plan, saw what we were trying to do. What was key was that Honeycomb saw us.” Darren ended up raising $30,000 from his community to purchase a food trailer to take his low-and-slow barbecue on the road!
“If I didn’t utilize Honeycomb, we would not have potentially hit this season,” said Luke Cypher, owner of Blue Sparrow food truck in Pittsburgh. Luke was able to raise funds to purchase his second food truck - or rather, his first Greyhound food bus! “One of the best parts about doing a Honeycomb campaign when we did was that we had a soft launch, meaning we had 3 months of running the bus before the season really kicked off,” he says. “That allowed us to work out a whole bunch of kinks, so that when we got to April and launched our full schedule, we were able to do it with a lot more confidence and readiness.”
Furthermore, Honeycomb is constantly innovating to help small businesses achieve their full potential under their crowdfunding campaigns. In certain areas of the country and for certain businesses, foundations are investing in small businesses through our Loan Participation Fund. For example, Black-owned businesses in the South can receive a $10,000 boost in their Honeycomb campaigns through investments from Souls Grown Deep and the A.L. Mailman Fund.
These investments, plus the individual investments from business’s customers and community, can make the difference between a business that wants to grow and a business that is actually able to grow.
Now that you know what crowdfunding is, want to get involved?
If you’re a small business owner looking into running a loan crowdfunding campaign with Honeycomb, you can easily get in touch with us by filling out the form below!