Summary
Crowdfunding allows entrepreneurs to tap into a diverse pool of backers through online platforms such as Stride Equity. The four primary crowdfunding types are donation-based, reward-based, debt-based and equity crowdfunding. The four types can also be combined.
In our previous article, we provide an overview of how equity crowdfunding works in Australia. In this post, we dive deeper into the nuances of crowdfunding, its various forms, and how startups and scaleups can leverage them to secure funding.
Crowdfunding has emerged as a popular alternative to traditional startup financing, allowing entrepreneurs to pool resources from a large number of backers via online platforms. While commonly associated with artistic and personal projects, crowdfunding has also proved a viable option for emerging businesses.
The four primary types of crowdfunding are donation-based, reward-based, debt, and equity crowdfunding. With an increasing number of hybrid models and emerging trends, distinguishing between them can be a challenging. We, therefore, offer a breakdown of each type, along with its respective advantages and disadvantages for founders and investors alike.
Donation-based crowdfunding
Donation-based crowdfunding is a form of crowdfunding where supporters contribute funds to a project or cause purely out of altruistic motives. Rather than seeking a financial return on their investment, backers donate funds to express their support for a particular individual, organisation, or social issue. Typically, this type of crowdfunding is used to raise money for non-profit initiatives, charitable causes, or personal needs such as medical expenses or community projects. Backers may receive non-monetary rewards, such as public recognition or tokens of appreciation. However, the primary incentive for donating remains the satisfaction of contributing to a worthwhile cause.
Reward-based crowdfunding
Reward-based crowdfunding is a type of crowdfunding in which backers contribute funds to a venture or project in exchange for a non-monetary reward. Rewards can take many forms, such as product samples, exclusive access to the project, or a personalised thank you note. The value of the contribution typically corresponds to the size of the contribution, with larger contributions receiving more substantial rewards. So, backers receive a tangible reward in exchange for their contribution but not in the form of ownership of the project or venture. Reward-based crowdfunding allows founders to test the demand for their product and get early feedback from backers. Therefore, reward-based crowdfunding can be an effective way for emerging companies to build a customer community around their venture.
Debt-based crowdfunding
Debt-based crowdfunding allows investors to lend money to a borrower or a business in return for repayment with interest. Investors do not receive ownership of the project or venture. This form of crowdfunding offers a more accessible financing option than traditional bank loans, which can have stricter eligibility requirements. For investors, it provides an opportunity to earn a fixed return on their investment at a higher rate than traditional savings accounts or bonds.
Equity crowdfunding
Equity crowdfunding presents a compelling opportunity for founders to raise capital by offering equity in their business to a diverse group of retail and wholesale investors. Investors receive partial ownership of the business in exchange for their funds. Equity crowdfunding platforms, such as Stride Equity, allow entrepreneurs to promote their investment opportunity publicly and provide prospective investors with an overview of their business through a dedicated offer page on the platform. Investors who invest in emerging companies through equity crowdfunding may gain financial returns in the forms of dividends or capital gains if the venture is successful. However, early-stage investments are risky. Therefore, investors should read all provided information carefully, and seek independent financial advice before committing to any investment.
Stride Equity – Combining the resources of venture capital with the power of equity crowdfunding
At Stride we combine the resources of venture capital with the power of equity crowdfunding. We invest our own capital alongside wholesale and retail investors and use our experience and expertise in investing, building and operating businesses to unlock the growth potential of our investee companies. We mentor and advise our investee company founders and provide access to our networks and connection to facilitate the growth and scale up of the businesses we invest in.
Our process consists of three main steps:
1. Co-investment
Our venture fund, Stride Lead, invests in companies that are successful in raising capital on the Stride Equity crowdfunding platform. We invest up to 20% of the total offer in highly vetted emerging businesses, together with wholesale and retail investors on the Stride Equity platform. We conduct rigours due diligence before presenting an investment opportunity to other investors. Our investment criteria ensure a comprehensive assessment of the people involved in the venture, the product or service, the market and the company’s potential for growth and scalability.
2. Expression of Interest campaign
We collaborate closely with our investee companies and promote their business initially through an expression of interest (EOI) campaign. Potential investors can review the investment summary, which is made available on the Stride Equity website and they may express their interest in participating in the capital raising round. This is an important step and is highly instructive on the level of investor interest, the type of offer that might be successful and the amount of capital that might be raised by the company through equity crowdfunding.
3. Offer campaign
Companies that generate sufficient interest during the EOI campaign are invited to launch their investment offer campaign. During the offer period, investors can make their investment via the Stride Equity platform. We work hand-in-hand with investee companies to ensure that investors have all the necessary information to make an investment decision and companies comply with all legal and regulatory requirements.
We encourage founders of emerging businesses wishing to raise capital and investors who want to benefit from an investment in high growth companies to contact us for further information.