Crowdfunding has allowed individuals and companies to generate millions of dollars for everything from product launches and new businesses to community projects and medical expenses.
Anyone can harness the power of these platforms to overcome financial obstacles or support a worthy cause. All it takes is an idea, the correct crowdfunding platform, and knowledge of how to run, or invest in, a successful fundraising campaign.
This guide will teach you everything you need to know about crowdfunding.
Crowdfunding
1. What is crowdfunding?
Crowdfunding is a way to raise small amounts of capital from a large number of individuals to fund a charitable cause or new business venture. The funds are often raised over a short amount of time, such as a few months.
Crowdfunding is a type of crowdsourcing and alternative finance, as it’s a method of obtaining finance outside of traditional banks. Crowdfunding is also done online, usually through social networks. This makes it easy for people to share a fundraiser they support with their following.
Any organization, business, or individual can use crowdfunding to raise money for a variety of causes, whether it be for charity, creative pursuits, business startups, school tuition, or personal expenses, for example.
Along with its use for charitable or donation-based causes, crowdfunding also assists with entrepreneurship by bringing investors and founders together. It does so by allowing entrepreneurs to grow their investors beyond the original circle of owners, relatives, and venture capitalists.
2. How crowdfunding works
Crowdfunding works by allowing large groups of people to pool together smaller investments to supply the funds required to launch a company or project. Individuals, charities, or organizations can set up a crowdfunding campaign for a specific cause, which anyone can then donate to.
Depending on the type of crowdfunding campaign, investors can either contribute money in exchange for incentives, like equity in the company seeking the funds or provide their donation as an act of goodwill.
Crowdfunding can take place through dedicated crowdfunding platforms (such as Kickstarter, Kiva, Indiegogo, and GoFundMe) as well as through social media networks. Crowdfunding sites earn revenue from a percentage of the funds raised and some have an “all-or-nothing” policy, meaning you have to reach your financial target to collect any of the funds.
Restrictions apply to who can fund a new business and how much they are allowed to donate. This is meant to protect more vulnerable or non-wealthy investors from risking too much of their savings. A high number of new businesses fail, therefore investors often face a high risk of losing their principal.
3. Types of crowdfunding
There are 3 main types of crowdfunding and each of these works in different ways.
Donation-based crowdfunding
Donation-based crowdfunding is one of the most common types of crowdfunding. It involves asking a large number of people to make a small donation toward a cause you feel passionately about, such as a charity.
Donation-based crowdfunding is an effective form of crowdfunding for things such as community-based causes or personal needs. This might include raising funds for a community vegetable garden or skate ramp at the local park as well as covering unexpected medical or repair costs.
Donation-based crowdfunding campaigns can be shared with your friends, family, and followers on social media. This increases awareness and encourages extra donations.
Rewards-based crowdfunding
Another popular type of crowdfunding is rewards-based crowdfunding, which is often used to raise money for a new business that provides a product or service.
As the name suggests, rewards-based crowdfunding offers rewards to donors based on how much money they donate. These might include small items made by the fundraiser themselves or items donated by partner companies.
An artist wishing to open his or her own gallery, for example, might offer miniature prints of their work, signed artworks, or even group workshops.
Equity crowdfunding
Equity crowdfunding (also known as investment crowdfunding) is a crowdfunding option for small-medium enterprises (SMEs) looking to raise a large amount of capital to launch or grow their venture.
With equity crowdfunding, donors receive a percentage of ownership within the business. This percentage will vary depending on the size of the donation or the company’s preferences. This method allows companies to quickly raise the money they need without the hassle and stringent requirements of a traditional business loan. Often, however, equity crowdfunding will require a large fundraising minimum to be viable.
4. Pros and cons of crowdfunding
Crowdfunding can offer many advantages to those who pursue it. It provides individuals and businesses with a way to raise funds when assistance from the government, non-profits, or financial institutions falls short.
Instead, fundraisers rely on the kindness of their community, and the traditional barriers of financial assistance are removed, such as meeting strict criteria. Fewer obstacles also make it quicker and easier for those wishing to raise much-needed funds for a worthy cause.
Additional advantages of crowdfunding include:
- There is no application process to go through, including filling out forms
- There are no lengthy waiting periods for your funds
- It’s easy and commonplace to share a fundraiser with your network on social media
- It’s easy to reach a wider network than your family or friends, as interested investors can find you through crowdfunding platforms.
Although crowdfunding offers plenty of advantages, it also comes with some disadvantages especially when you don’t reach your funding objectives as in addition to putting the reputation of your business (and investors) at risk, any finance that has been pledged so far will be returned to your investors.
5. Examples of crowdfunding
To inspire your own fundraising efforts, it’s helpful to look at past examples of successful crowdfunding campaigns. Although not all crowdfunding endeavors succeed, some do go on to achieve phenomenal success.
- Oculus VR is one such example. This American company was completely funded through Kickstarter. The company founder, Palmer Luckey, launched the campaign in 2012 with an initial goal to launch $250,000. These funds were to go toward producing virtual reality headsets for developers which were designed for video gaming. The campaign surpassed this figure and crowdfunded $2.4 million. Just two years later, Facebook acquired Oculus VR for $2.3 billion in cash and stock.
- M3D, a company that manufactures small 3D printers, also had huge success through crowdfunding. In 2014, the founders raised $3.4 million for their Micro 3D printer, which is now available through retailers such as Amazon and Staples.
- In 2019, another crowdfunding campaign reached a whole new level of success. Critical Role, a weekly live-streamed tabletop role-playing game featuring a group of prominent voice actors, wanted to raise funds for its new offering, “The Legend of Vox Machina.” In just 24 hours, the campaign raised $4.7 million, setting a new 2019 record.
- Another impressive example is the crowdfunding campaign for Peak Design’s Travel Tripod product. Although the campaign had an end target of $500,000, it went on to raise $12.1 million within 56 days.
Of course, not all campaigns have to raise millions of dollars to be deemed successful. RadioPublic, for example, raised $150,000 from their passionate users and listeners, while Gimlet Media ran a $200,000 equity crowdfunding campaign in 2014, before being acquired by Spotify.
6. Best-known crowdfunding websites
GoFundMe, Indiegogo, and Kickstarter are the most-known crowdfunding websites you can find, but there are many more that exist just be aware that most of these sites have specific policies about what you can and can’t use them for, so make sure to read their rules and regulations before you launch your campaign. Kickstarter, for example, prohibits equity crowdfunding and has a list of items you’re not allowed to include in your fundraising campaigns.
GoFundMe
GoFundMe has a global community of over 50 million people, making it the world’s largest crowdfunding platform. It’s the first and only platform with a donor protection guarantee and has raised over $5 billion for individuals, teams, and nonprofits.
There are no platform fees, but fundraisers can expect payment processing fees of 2.9% plus $0.30 per donation.
Indiegogo
Indiegogo has assisted with the funding of more than 800,000 global ideas since 2008. It has a wide range of tools for promoting your campaign and is visited by over 15 million people each month. Fees include a 5% platform fee plus a 3.2% third-party processing fee.
Kickstarter
Kickstarter is one of the most well-known crowdfunding platforms around the world and has raised over $6.2 billion for projects so far. It offers a number of creative categories, such as art, film, and publishing. With its “all-or-nothing” model, fundraisers don’t receive their funds or get charged fees unless they reach their goal. There’s a fee of 5% as well as processing payment charges of 3% to 5% per transaction.
7. Crowdfunding FAQs
Do you pay back crowdfunding?
This depends on the type of crowdfunding. Donation crowdfunding doesn’t require the fundraiser to pay back the donor’s money, as it’s usually for raising funds for charitable causes or non-profits. Additionally, friends and family members are unlikely to want repayment.
Debt-based crowdfunding, however, involves funds that are pledged by investors as a loan. Therefore, these must be paid back with interest.
Rewards-based crowdfunding involves compensation to donors in the form of incentives, like free products or services. These are usually allocated in accordance with the size of the contribution.
With equity crowdfunding, contributors receive a financial reward for their funding by owning shares of your company.
How do I know if crowdfunding is right for me?
Crowdfunding is designed to meet a wide variety of people and their needs, including any financial barriers they may encounter.
Many think crowdfunding is only for individuals requiring emergency financial assistance, however, entrepreneurs and businesses wanting to finance a new project or creative idea, or raise capital can also do so.
What can I raise money for?
Crowdfunding can be used to raise money for yourself, friends or family, or even people you don’t know personally. Fundraisers encourage donations for a wide range of causes, such as medical expenses, education, volunteer or non-profit organizations, sports teams, community groups, funerals costs, and pets.
How much do crowdfunding sites charge?
Different crowdfunding sites tend to charge different fees. These might include payment processing fees, which are typically 3% to 5% per transaction or a fixed percentage of donations raised each month. Other platforms require a minimum target to be raised, otherwise, donors have their payments reimbursed.
Are crowdfunding sites worth the cost?
Although crowdfunding sites are an effective way to raise required funds within a short amount of time, their fees and charges can add up. Closely consider your cause and whether or not these costs will be worth it. Certain elements may work in your favor, such as having a large social media following or an existing customer base. Fundraisers who frequently share their campaign with their friends, family, and following (while encouraging them to do the same) have more success than those who don’t.
How we chose the best crowdfunding sites
To narrow down the best crowdfunding sites in Chapter 10, we began by researching and reviewing the most popular platforms available. Using criteria such as features, performance, number of users, costs, and the type of crowdfunding offered, we were able to narrow these down to the top crowdfunding sites.
Conclusion
Crowdfunding is an effective method for raising the money needed to overcome financial obstacles both personally and professionally. Whether launching a new product, expanding a business, raising money for a charity, or covering medical expenses, there’s no limit to what crowdfunding can achieve.
