As a business owner establishing a startup, you may want to start fundraising rounds or find investors. Crowdfunding is a great way to fund your business, especially if you are trying to make it through the initial stages. This article will outline the types of crowdfunding and how to raise capital through crowdfunding.
What is Crowdfunding?
Crowdfunding means raising small amounts of money from a large number of people (usually the general public) to finance your business. You can use online platforms to pitch your business to the public to raise capital.
In New Zealand, the Financial Markets Conduct Act (FMCA) governs crowdfunding. The FMCA requires you to seek crowdfunding via an intermediary that offers equity crowdfunding services. These intermediaries must:
- hold a licence to undertake this service; and
- undergo regulation by the Financial Markets Authority.
Types of Crowdfunding
There are three main types of crowdfunding in New Zealand. Each type has its features and structures. You must understand the different types to raise funds in a way that suits your business needs. The three different types of can suit different circumstances.
| Type | Explanation | Circumstance |
| Rewards-based crowdfunding | The lender gets a non-financial reward in return for lending money. | Rewards-based crowdfunding may be better if you prefer to keep your entire ownership and build customer loyalty. With a rewards-based campaign, you can test your products with the public and hype your business up before its official launch. |
| Equity-based crowdfunding | The lender will get shares or dividends in return for investing in your company. | Equity crowdfunding may be best if you want to raise large amounts of money and do not mind selling parts of your ownership to the public. |
| Peer-to-peer lending | You borrow money from the investor and repay it over time. | If you want to avoid going to a bank for a loan, peer-to-peer lending will be a good fit. With this, you can beat the interest rates, although remember, it is still a debt. As a result, you will eventually need to pay this money back to the investor. |
How to Start Your Campaign
Once you decide what type of crowdfunding you want to go for, you can organise your campaign.
1. Choose A Platform
First, you need to choose the platform you will raise funds. Different platforms will allow campaigns to run for different amounts of time. However, they may also limit how much you can raise and attract different investors.
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2. Apply to the Platform
After choosing the platform, you can start applying to the platform to start your campaign. First, fill out any forms and documentation so the platform can verify your business is legitimate.
3. Prepare Your Pitch
Once the platform accepts your application, you can start preparing your pitch. Your pitch will either make or break your campaign. First, you need to describe your product or idea to the public in a way that convinces them to invest in you over other businesses.
Furthermore, you need to outline why you want the funds and how much you need. For rewards-based crowdfunding, you must explain what investors will get. Alternatively, you must state the equity stake and share price.
You may be asked to share business and financial information with potential investors if you run an equity-based campaign. However, these investors are, of course, the general public, so you must be careful. The public may want to see financial statements, forecasts, a business plan, and a valuation to make an informed decision.
4. Consider the Outcomes
Once the campaign ends, some platforms will take all the money raised home, and other platforms will only let you take the cash home if you reach your target amount. With an equity campaign, you must issue share certificates or convertible notes to the investors.
Key Takeaways
To raise capital through crowdfunding, you must first choose the type. You can either run a rewards-based, equity-based, or peer-to-peer lending campaign. Next, your company will need to select a platform to use for crowdfunding and pitch its idea and products to the general public. Once the campaign ends, you will get the cash you have raised if you meet your target amount, or else you may lose all the money depending on the platform’s rules.
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Frequently Asked Questions
Crowdfunding is a way to raise capital by pitching your idea to the general public through an online platform. If the public likes your idea or product, they can choose to invest in your business.
With equity-based crowdfunding, investors will get an equity stake in your business as a return for investing. Equity-based crowdfunding is regulated by the Financial Markets Authority and FMCA. Hence, you must undertake the crowdfunding campaign via a licensed intermediary.
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