Building a startup is an exciting undertaking, but it’s also an expensive one – and most founders don’t have the funds to go it alone. So where does the money come from? While the occasional developer has the type of idea that attracts venture capital, the majority will have to pull together funds from a variety of sources, including crowdfunding and peer-to-peer lending. In other words, to build a business, you need to think socially.
The Rise Of Startup Crowdfunding
Crowdfunding is a vital part of today’s economy, funding everything from health emergencies to product development, but in the startup sector, the platform that really got everything going was Kickstarter.
Launched in 2009, Kickstarter was specifically designed to fund creative projects, whether that was a film or a product, like the fidget cube. Many companies have used the platform to fund early production of multiple products, and because funding is only released if the project meets its goals, the platform minimizes risks for investors and helps founders get a sense of how successful their ideas would be if they got them to market.
Another advantage of crowdfunding is that factors that can prevent founders from accessing a loan, such as credit history, just don’t matter. That means if you have poor credit or limited history, crowdfunding could help you get the money you need to launch your business. Crowdfunding also lets you build an alternative reputation for success, as most display prior successful campaigns – and those can be at least as important in swaying funders as a traditional credit history.
The Peer-To-Peer Model
While crowdfunding is a great option for businesses that need to fund a product concept, for those starting more traditional businesses and need to rent office space and get permits, they aren’t always the most helpful; these businesses need a less-directed funding framework, though they may not need as much money as a startup that’s launching a product. These are the startup founders who can benefit most from peer-to-peer lending.
Peer-to-peer lending, which has had a major public presence since about 2014 when Lending Club went public, is a model that uses a variety of data points to assess creditworthiness. Then, based on this scoring system, approved borrowers can borrow small amounts at low-interest rates from other members of the network. Each individual investor is able to assess approved applicants’ profiles and decide whether, and how much, to lend, but because there are numerous lenders on each project, the group minimizes their individual risk.
Compared to crowdfunding, individuals relying on peer-to-peer lending to fund their startup typically need a better credit score and a more structured business plan; while crowdfunding relies on traditional social networks – your friends will toss some money towards your new endeavor and share it with their friends – peer-to-peer lenders are private individuals whom you’re unlikely to have a personal relationship with. They’re lending from a place of goodwill, but it’s conditional. Your project needs to deserve it.
Whether you choose crowdfunding or peer-to-peer lending to fund your startup, the key is to find an audience that your idea appeals to – your crowd – and master the intricacies of the platform. Study successful projects and talk to investors about what they look for in a business plan. Even if this is your first foray into the business world, you need to put your best foot forward.