In the turn of the decade new and more exciting ways to attract investors has come about. Likewise to every old-fashioned way of doing things, turned upside down by Millenials, the way we invested isn't the same. It's way easier than before to get investors and funding for your startup or project idea. In comparison to how it was just two decades ago, where you had to pitch to a group of maybe 10 investors amongst a round table, finding hungry investors is simple and just with a click of a button, the right platform you can get funded for nearly everything. Not only businesses you can get funded for school, your ideas, or passion. The limit of collecting funds from anyone isn't there anymore.
Read also: Equity vs Revenue Crowdfunding
In the midst of this crowd-funding trend came about two different ways of collecting money from investors/backers. In the following paragraphs, we will discuss the differences between the very popular reward-based crowdfunding (e.g. Kickstarter & IndieGoGo) and the new concept of revenue-based crowdfunding (Crowdholding).
1. Reward-based Crowdfunding
Reward-based crowdfunding is a way of collecting funds to fulfill an audience needs or wants with little to no reward. Sometimes companies/inventors will give away a small stake in their companies/project profit to the backers that give away the most. However, most of the time there isn't any reward involved. Often people back a project because of its uniqueness or for the interest in the project. Sometimes the creators will give away a prize or something significant towards the process for donating, but mostly that's all you'll be receiving.
2. Revenue-sharing crowdfunding
Revenue sharing is alike to the original concept of investing. You place forward some funds to help start their project/company and as a reward, you get a return from future sales. Instead of stocks/equity, you will receive a small portion of the company's revenue for a short period of time. Similar to collecting a royalty, but instead of a permanent percentage until a company reaches a goal you will be collecting the company's money no matter if the goal is reached or not. It's very controversial and some companies find it counter-intuitive and evil However, revenue sharing is particularly attractive for businesses with seasonal sales, when you business is good, you pay back more, when sales are slower, payments will go down as well. Revenue sharing make the investment process more simple, as it does not deal with the complexity of equity, as it the investors are not owners of the business.
Let’s look at an example. Company “Bobo’s” is a restaurant that has been doing business for 2 years with 100,000$ in the last 12 months revenue and an average annual growth rate of 5%. The restaurant’s owner believes that the community of customers and supporters that the company has created, represents a potential capital source and many of its customers would be thrilled about helping the business grow. Bobo’s is looking to make some improvements to its restaurant, which will cost 50,000$. The owner of Bobo’s turns to the crowd for raising capital, promising they will be paid back for 5 years or until they multiply the crowd’s investment by 1.25x Amount Invested. This motivates the crowd to play an active role in the restaurant’s activities. They will be directly contributing to the performance of Bobo’s y advocating the brand and continuing their relationship. Bobo’s will benefit from healthier revenue growth and a more engaged customer base.
Which is better?
When comparing revenue-sharing crowdfunding to other methods for raising capital, a business must find the most attractive option for their particular case. Companies need to consider the speed of underwriting, motivation of the investor base, flexibility of payments and no personal guarantees. If all these factors are attractive, then it would logical to use revenue-sharing crowdfunding over reward-based crowdfunding.
There a ton of comparisons I could throw out to try to alter your opinion, however, knowing which is best is based on your position. If you're an investor you would like revenue-sharing more than reward-based crowdfunding, but if you're a company you will like reward-based crowdfunding more. It's very simple logic and it's easy to understand why this is true.
There are thousands upon thousands of alternative ways of gaining capital for your business but revenue-sharing is the newest and upgraded version of crowdfunding. Depending if you're an investor or the CEO of the company, can lead you to the decision of either reward-based or revenue-sharing crowdfunding. To find the right structure for raising capital, the business needs to have a strong understanding of the business performance. Nevertheless, both ways of crowdsourcing funds are spectacular and will stick around for years to come as long as there are platforms for it.
You may also be interested in:
Alternative Finance for Small Business
Blockchain Technology & Crowdfunding
The Crowdholding Story
And also remember, best of luck with your business!