Crowdfunding is an increasingly popular financial model transforming how individuals and businesses access the capital they need to bring their ideas to life. In the simplest sense, crowdfunding is a fundraising strategy that allows individuals and companies to raise money from many people, usually through an online platform.
Let’s take a closer look at what crowdfunding is, how it can be used to reach business goals, and what strategies you can implement to crowdfund a project of your own successfully!
What Is Crowdfunding?
Crowdfunding is an alternative way of financing a project or a business.
Contrary to business loans that banks offer, crowdfunding includes tiny investments from a large number of people. These investments are realized via the Internet, through crowdfunding platforms such as Kickstarter, Patreon, Indiegogo, and more.
Investopedia defines crowdfunding as “the use of small amounts of capital from many individuals to finance a new business venture”.
The process begins when an individual or a company starts a crowdfunding campaign on one of these platforms. The campaign lasts for a limited amount of time, and a minimum sum of money must be collected.
Key Takeaways
Crowdfunding entails gathering small amounts of money from many people to set up a project or business;
Crowdfunding is executed through crowdfunding platforms on the Internet;
There are four types of crowdfunding: donation-based, reward-based, debt-based (P2P lending), and equity-based.
How to Define Crowdfunding?
Crowdfunding is a popular alternative financing method. To gain a better understanding of what it truly entails, let’s take a look at the four main types of crowdfunding.
- Donation-based. The investors are “donors” and expect nothing in return. Instead, they simply share the enthusiasm of the individual or the company behind the project and want to support their work.
- Reward-based. With this type, backers receive a particular benefit or “reward” once the project is done. Depending on the type of the project, backers can get free access to a platform, a certain discount for a product, a free digital copy of an album, and so on.
- Debt-based (P2P lending). In this case, the investments made are considered loans. This means the person or company behind the campaign must return the money to crowdfunders, usually with a fixed interest rate and a deadline.
- Equity-based. What crowdfunders receive for the money they invested is equity. They become, in other words, the shareholders of the company. For this reason, in equity crowdfunding, the investments are usually larger compared to the previous types of crowdfunding.
| Platform | Type of Crowdfunding | Fees & Charges | Audience Demographics | Success Rate (%) | Project Categories |
|---|---|---|---|---|---|
| Kickstarter | Reward-based | 5% transaction fee | Global, creative enthusiasts | 37% | Art, technology, design, games, etc. |
| Indiegogo | Flexible Funding | 5% platform fee | Global, diverse audience | 17% | Technology, film, music, gadgets, etc. |
| Patreon | Membership-based | 5-12% creator fee | Global, content creators | N/A | Art, music, writing, podcasting, etc. |
| SeedInvest | Equity-based | 7.5% placement fee | Accredited investors | 19% | Startups, real estate, tech, healthcare, etc. |
Why Is Crowdfunding Important?
Through crowdfunding, a project can be funded by hundreds or even thousands of people in exchange for a reward or equity. It is a highly effective tool for entrepreneurs, developers, and creators to leverage their network of contacts and create a viral effect to fund their projects successfully.
Crowdfunding has seen tremendous growth in recent years, allowing entrepreneurs to raise money from a larger pool of potential investors and supporters than ever before. From small startup companies to established businesses, crowdfunding has become a popular way for entrepreneurs to access the capital they need to bring their vision to fruition.
However, the benefits of crowdfunding depend on the nature of your project and your business aims. Not all projects and businesses can be set up through crowdfunding. It is also essential to decide which of the four types of crowdfunding best suits your purposes. The following are some of the benefits of crowdfunding.
1. Funding for startups
Traditional funding options may be limited or challenging to obtain for new businesses, but crowdfunding allows entrepreneurs to showcase their ideas and attract potential investors who are interested in supporting innovative projects. Crowdfunding campaigns can help startups secure the necessary capital to launch and grow their businesses.
2. Validation and market testing
Crowdfunding serves as a valuable validation tool for entrepreneurs. Businesses can easily gauge market interest and validate their concepts. The feedback and engagement received during a crowdfunding campaign can provide valuable insights into the target market’s preferences, allowing entrepreneurs to refine their offerings and make necessary adjustments before fully entering the market.
3. Building a community
With a crowdfunding campaign, you can engage with your backers and create a sense of ownership and involvement among supporters. This community-building aspect not only helps raise funds but also establishes a strong customer base and brand advocates who can continue to support the business in the long run.
What Are The Best Crowdfunding Strategies?
If you are wondering if it’s possible to earn with crowdfunding, the short answer is – yes! You can use crowdfunding as a source of income in a few ways. The following strategies outline the basics that you should keep in mind.
1. Set clear goals
One of the best strategies to implement is clear goal setting! Specify the amount you need to raise and how the funds will be allocated. Goals provide transparency to potential investors and help them understand the purpose and impact of their contribution.
2. Build a strong network
Prioritize building a network of supporters and potential investors before launching your crowdfunding campaign. Leverage your existing connections, engage with industry influencers, and attend networking events to expand your reach and increase the chances of attracting investors.
3. Offer appealing rewards
Incentivize potential backers by offering attractive rewards that align with their interests and investment levels. Different rrewards can range from exclusive product access to personalized experiences, providing a tangible value proposition that entices individuals to invest in your project.
4. Engage with backers
Utilize social media platforms and other digital channels to actively engage with your backers. Regularly update them on the progress of your campaign, share behind-the-scenes content, and respond to their comments and inquiries promptly. When you engage with backers you help to create a sense of community and strengthen the relationship between your project and its supporters.
5. Create a sense of urgency
Incorporate a sense of urgency into your crowdfunding campaign by setting a limited timeframe for contributions or offering early-bird incentives. Urgency is keyu as it encourages potential investors to take immediate action, increasing the momentum and excitement around your campaign.
6. Create a platform
Lastly, you can create a crowdfunding platform and generate income from platform fees. However, this is easier said than done. Not only do you have to be skilled in programming and web design to develop such a platform (or pay someone to do it for you), but you also have to make it stand out in the myriad of platforms that are out there.
This is a complex task that can be immensely rewarding if done correctly.
What Are The Disadvantages of Crowdfunding?
The disadvantages of the mentioned strategies depend on your role in the crowdfunding chain and the nature of the crowdfunded project or business.
One of the apparent downsides is that crowdfunders lose money if the business they invest in fails to succeed. Also, with smaller projects, the period between investing and project realization can be long and not worth the wait.
Finding people who would invest in their business or project can be a grueling task for entrepreneurs and creators. Even after enough funds are raised, entrepreneurs will get a bad reputation if their business collapses. The same can be said for the creators. If their project does not meet the expectations of its backers, creators are less likely to be supported in the future.
Regarding crowdfunding platform owners, they will certainly lose time and money if they fail to attract people to their platform. Coming up with better deals that have yet to be offered on well-established platforms like Kickstarter and Indiegogo is very hard. And even if they manage to do so, advertising their crowdfunding platform can be costly initially.
Additional Tips & Tricks
- More then $17M are generated through crowdfunding every year in North America with the everage raise of around $30,000
- Leverage social media to spread the word! Use social media platforms like Facebook, Twitter, and Instagram to promote your campaign.
- You can also use video to tell your story. A video is an effective and modern way to connect with potential investors.
Success Story: “Pebble Time Smartwatch” on Kickstarter
One of the most notable crowdfunding success stories is the Pebble Time Smartwatch campaign on Kickstarter. In 2015, Pebble launched its third-generation smartwatch, the “Pebble Time,” seeking $500,000 in funding.
Within just 30 minutes of the campaign’s launch, the company surpassed its funding goal, and by the end of the campaign, they had raised over $20 million, making it one of the most funded projects in Kickstarter’s history at that time.
What contributed to their success?
- Compelling Story: Pebble presented a compelling narrative about their new smartwatch, emphasizing its innovative features and sleek design.
- Engaging Visuals: The campaign used high-quality images and videos to showcase the product and its functionality.
- Exclusive Rewards: Backers were offered exclusive early-bird discounts and limited-edition color options, creating a sense of urgency.
- Strong Community: Pebble had already built a loyal community of backers from previous campaigns, which helped generate early momentum and attract new supporters.
The Bottom Line
Crowdfunding is a form of alternative financing that uses small contributions from a large group of individuals to fund projects or ventures. This type of financing allows entrepreneurs to bypass traditional methods of securing capital, such as bank loans or venture capital, while allowing them to reach out directly to the public quickly.
With us, you’ve learned what crowdfunding is and why it is important. You’ve got strategies for crowdfunding and a few tips & tricks in your pocket. With all this knowledge, you now understand if crowdfunding is the financing approach you need to take for your company or organization.
Crowdfunding FAQs
Anyone who contributes to a crowdfunding campaign can be considered an investor. Still, investors are typically individuals who commit large amounts of capital to a movement and can seek a percentage of the ownership over a project.
Getting funding for your crowdfunding campaign can be a complex process. Defining your target audience and analyzing your marketing approach toward them is an excellent place to start.
There are many crowdfunding sites to pick from if you are looking to launch a crowdfunding campaign. The best crowdfunding sites for your business will be those relevant to your donors and able to attract investor attention.
There are numerous examples of successful crowdfunding campaigns that have lifted a product or brand into the mainstream. Without naming any in specific, the best crowdfunding campaigns are the ones that manage to achieve a viral effect and spread their message to a large number of potential investors.
No, crowdfunding does not involve paying back the backers. In crowdfunding, individuals or businesses raise funds from a group of people (backers) to support a project or idea, and the backers typically receive rewards or incentives as a token of appreciation, but they do not expect repayment of the funds contributed.
