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Crowdfunding offers start-ups another financing option. However, there are great differences in the design, not every form is suitable for every company.

At the latest since 2009, when the internet portal Kickstarter made crowdfunding a mass phenomenon, start-ups also have another financing option. In Germany, for example, Panono, a company that developed a camera ball; or Bonaverde, a start-up with the plan to develop a novel coffee machine. Panono received 920,000 euros, Bonaverde 500,000 euros. More recently, neobank Tomorrow released a funding round to the crowd and raised around three million euros. "These 2,000 investors are like ambassadors for us," co-founder Michael Schweikart exulted in the Startbase interview

. Tomorrow can expect useful feedback from them to further improve its own product, he said.

But some of these examples show how tricky the model is: both Panono and Bonaverde have since gone bankrupt. It's a fate shared by about a third of all crowdfunded startups, as finance expert Markus Petry of Wiesbaden Business School warned last month on Springer Professional's blog. Which advantages and disadvantages there are in crowdfunding and how such a process is best run, that is why founders should take a very close look. An overview of the key points.

What forms of crowdfunding are there?

In fact, not all crowdfunding is the same, there are as many as four different variants. These differ mainly in what the investor can expect for his money.

Donation crowdfunding: here the backers get nothing in return, they give their money unconditionally to the crowdfunding campaign. This variant is, however, rather unattractive for start-ups with a profit interest, rather non-profit organizations resort to this, such as the initiative "My basic income", which wants to finance crowdfunding experiments with the unconditional basic income with the help of donations.

Rewarding crowdfunding:

In this variant, the investor receives a fixed return for his trust. Very often, this involves products that are funded by the campaign. Artists often use this approach by making crowdfunded albums and films available to backers exclusively or at least on a priority basis. Startups that want to create products for end consumers can also use this. A few years ago, for example, the e-skateboard company Mellow Boards funded itself this way.

Lending crowdfunding:

in so-called crowdlending, entrepreneurs have to pay back the money they put in at some point. There are different models, but often the startups have to pay interest on the capital invested, possibly regardless of success. Usually, these interest rates are quite high; after all, loans to emerging companies tend to be risky. Panono, for example, raised money again in 2014 - after its first funding round - this time via crowdlending.

Crowdinvesting:

Here, investors receive a direct share in the company's success in return for their money. The investment can be treated as a subordinated loan, which would effectively make it part of the company's equity. Alternatively, the investors can also receive shares in the company directly and thus profit, for example, in the event of a possible exit. Tomorrow also used this option, and its crowd investors now have a six percent stake in the fintech.

When can crowdfunding work?

Crowdfunding is especially worthwhile for founders who have trouble getting money elsewhere. When bank and other capital providers shy away, it allows them to pitch their ideas directly to potential customers or to people who share their vision. Just because a startup can't get capital directly doesn't necessarily mean the idea is no good. Venture capitalists, for example, often have clear portfolios and evaluation schemes, and most are upfront about not investing in every idea that might work. Banks are more cautious anyway, often demanding collateral for loans that young founders can't provide.

One advantage of crowdfunding is direct contact with potential customers if the startup is producing an end-user product. This allows the product developers to learn how well their idea is being received and if there is room for improvement.

What appeals to many founders is that, depending on the crowdfunding form, they remain independent. Unlike venture capitalists, the investors who come through the platforms don't necessarily get shares in the company, nor do they demand accountability similar to that of, say, a bank.

What can cause crowdfunding to fail?

The same points that argue for a move into this form of financing also argue against it. There are often reasons that neither bank nor VCs want to give money to a startup, perhaps the idea is just no good when several experts wave it off. Crowdinvestors also can't bring the same expertise to the company as larger backers who have brought many startups to market before. "Investors can hardly assess the validity of the business model and the prospects of success of the financed start-up themselves and are dependent on the risk assessment of the platform operators," also warns finance expert Markus Petry in his blog post.

But even if the founders firmly believe in their idea, there are further difficulties. If you want to inspire the masses, it will be difficult to do so with hard business figures; instead, crowdfunding platforms need enthusiasm and excitement to achieve goals.

Speaking of goals: Often crowdfunding platforms stipulate that interested parties give a clear number they want to collect. With most providers, if that target number is not reached, all the money is dropped. In other words, if you can only raise 490,000 of the 500,000 euros you are aiming for, you will end up empty-handed. So anyone who tries crowdfunding should think very carefully about how much money they need.

What platforms are there?

The largest providers worldwide are the American platforms Kickstarter and Indiegogo, which have also been usable in Germany for a few years. Kickstarter is still the gold standard of the industry, but due to the sheer size may not be interesting for every user. Indiegogo has the advantage that the site does not insist on a funding goal to be reached.

The German primus is Startnext, which - similar to Kickstarter and Indiegogo - is open for any kind of crowdfunding, both for artists and entrepreneurs. In this country, there are also a number of crowdinvesting platforms, such as Seedmatch, Companisto and Innovestment.

With Venturate, there is also a provider on the market that offers "curated crowdfunding". There, there is a deal captain per project - usually a business angel - who reviews the start-up and negotiates the valuation, which is the basis for all further investments.