What Is Crowdfunding?
Last Updated: January 11, 2023
Have you ever had a great business idea but no means to finance it? In those situations, people often think, “If I could get a million people to donate $1 each, I’d have a million dollars to fund my ideas with!” Well, that’s more or less what crowdfunding is all about.
Apart from telling you how to get a million dollars, this article will answer questions such as:
- What is crowdfunding?
- How is it regulated?
- What are the pros and cons of crowdfunding?
And many others. So kick back and let us take you through the fundamentals of crowdfunding.
What Is Crowdfunding and How Does It Work?
Simply put, crowdfunding is an accumulation of money (usually in order to start or support a business or a project) by collecting smaller amounts from a large number of individual investors. It’s mostly done through social media and special crowdfunding sites and platforms.
Now, let’s answer the second question: how does crowdfunding work?
When it comes to traditional ways of raising capital for a business or a fund, most countries enforce certain legal restrictions designed to protect inexperienced individuals from investing too much of their savings into a business that might fail.
This is where crowdfunding platforms come in. With crowdfunding, anyone can invest any amount of money, no matter how big or small.
This is an amazing idea because you no longer have to apply for a business loan or make nice with a wealthy sponsor as a part of your funding campaigns. One of the biggest benefits of crowdfunding is that you can pitch your idea anytime and if the investors like it, they can support it with as much money as they think your idea is worth. No minimums, no maximums, no strings attached.
While crowdfunding is becoming an increasingly popular way to get small donations using the internet, there are some similar concepts that need to be explained as well:
- Crowdfunding vs crowdsourcing: the main difference between crowdsourcing and crowdfunding is that with the former, you are not typically collecting money. Rather, crowdsourcing is used to source information, products or skills from individuals or groups.
- Crowdfunding vs. fundraising: While online crowdfunding is mostly used to collect financial assets in order to support a business idea or venture, fundraising by definition is seeking financial support for a charity, a project, or a political campaign.
Types of crowdfunding
While receiving funds from investors interested in your business idea sounds like a relatively simple concept, there are still as many as four different types of crowdfunding. Let’s see what they are:
This is pretty self-explanatory. People give you or your company money without wanting or expecting anything in return. They do it simply as an act of support towards you or your business venture.
With this type of crowdfunding, you are actually borrowing money from your backers. Everything they invest needs to be repaid by an agreed date with specified interest.
This method is very popular, especially when it comes to crowdfunding for startups. In this case, you send rewards as a token of appreciation to backers for supporting your business. These rewards usually vary based on the size of the donation and typically include things like T-shirts, coupons, discounts for products and services, etc.
This is a great way to run a crowdfunding campaign if you run a small business or you’re looking to get your startup going. With this type of crowdfunding, your backers are not just giving you money. Rather, they are investing in your company because they are given a small share of your business, based on the size of their donation.
It is important to note that there are certain limitations to crowdfunding. For example, equity-based crowdfunding is not allowed on some websites, such as Kickstarter. So if you are looking to finance your idea this way, you need to look at equity-based crowdfunding platforms. Also, there are certain rules and limitations regarding crowdfunding for nonprofits. All of these issues depend on a number of factors, but mostly on the website you choose and the legal limitations of the country you’re in.
This is why it is not recommended to dive headfirst into your first crowdfunded project. Take some time to read up and see if this is really the way you want to start your project or a business. Checking out some statistics on small businesses may help as well.
Crowdfunding Pros and Cons
As with everything else, there are good and bad sides to crowdfunding. Whether you’re looking to submit your first crowdfunding investment or looking to go to crowdfund your startup, here are some advantages and disadvantages of this funding model we think you should consider:
- Very little financial risk: One of the biggest crowdfunding perks is the fact that you, as a business starter, bear very little financial risk. All you need to do is pitch your idea, and if the backers like it, they will support you. This, of course, doesn’t hold true when it comes to debt-based crowdfunding.
- Your brand gets more recognition: Not only is crowdfunding a great way to raise money for projects, but it can also be seen as free advertising for your product or brand. If your idea gets enough traction on Kickstarter or Gofundme, it becomes the “talk of the town,” and soon enough, everyone will want in on the action.
- One of the great perks when crowdfunding a product or a service is that you can use your crowdfunding campaign as free advertising. If your campaign gets enough traction, the website itself will push it forward based on algorithms, and you can always share your ideas with everyone via social media.
- Crowdfunding is also a great way to test the waters before you officially launch your product or service. If your idea is not getting the attention of enough crowdfunding investors, it could be a signal to go back to the drawing board.
- If you are considering crowdfunding to start a business or for any other purpose, you should know that it requires a lot of effort and even more time. Your job is not done when you post your idea on Kickstarter. That’s when the real hard work begins.
- There is a very good chance that you won’t make any profit on your crowdfunding ideas, mostly due to the oversaturation of most markets. Your idea really needs a niche audience in order to be successful.
- Throughout the brief history of crowdfunding, there have been more than a few stories involving scams and fraud. Be very cautious who you take on as backers.
Best Crowdfunding Sites
We’ve mentioned some of them in this article already, but let’s take a closer look and see what the best crowdfunding websites for business startups available online today are:
- Krowdster: This is the best solution for those whose crowdfunding strategies include a serious marketing campaign. Krowdster grants you access to professionally designed press and social media campaigns to push your product. For a fraction of a price, you get your product or service promoted in a professional way.
- GoGetFunding: While you can use this crowdfunding platform to promote your business, it is more oriented towards crowdfunding charity actions. It is a great place for people looking to donate or collect funds for a higher cause.
- KickBooster: The best option for both investors and project creators. KickBooster offers affordable plans for creators and cash back options for investors. It seems like everyone wins with Kickbooster.
- Crowd Funding Exposure: Probably the best option if you are looking for some old school, in-your-face type of marketing. Over 50,000 successful crowdfunding examples funded their ideas through this platform. Not only do they offer promotions on social media, but they can also link your product to radio and even TV stations.
There are some more excellent crowdfunding sites out there, and if you just need to do a little research to find the best crowdfunding sites for your project.
Successful Crowdfunding Campaigns
Now that we’ve found an answer to “what is crowdfunding?” and explained how it works, let’s take a look at some businesses you maybe didn’t even know were originally crowdfunded. Here are some of the most successful crowdfunding stories:
- Oculus VR: One of the pioneers in modern virtual reality hardware started as a crowdfunded business. They started their campaign with the goal of raising $250,000 but ended up getting over $2.4 million! Now that’s a success story. To top it all off, Oculus VR was acquired by Facebook Inc. in 2014 for a whopping $2.3 billion.
- M3D: A company started by two friends, producing small 3D printers with a large ink capacity, managed to raise $3.4 million on Kickstarter in 2014. This product can now be bought in digital and physical stores all over the country. (Amazon, Staples, etc.)
How to Run a Successful Crowdfunding Campaign
Now, seeing the examples, you’re probably interested in knowing how to crowdfund a project successfully yourself. Here are some tips and tricks you can use to achieve that:
- Market what’s important: Make sure that you’re not just doing marketing for marketing’s sake. The materials you promote through the media need to have some merit and value in order to get the audience’s interest. You don’t simply need to explain what your product is, but also appeal to your potential customers’ emotions. In order to do that, you need to know who your target customer is before you start your crowdfunding campaign.
- Be straight with your backers: If you’re crowdfunding for business, you’ll want to be open with your backers. If somebody is investing in your business, they will feel more comfortable if you keep an open line of communication with them. This will make them feel more comfortable with the idea of investing in your business, and this may lead to recommendations, which could bring even more backers.
We opened this article trying to answer “what is crowdfunding?” and “how does crowdfunding work?” While we hope that we managed to answer those questions, we also tried our best to give you some insight into the finer points of crowdfunding.
A few years ago, we could say that crowdfunding is the business model of the future, but today and after the successful examples we have provided, it is clear that crowdfunding is the business model of today.
It is affordable, fairly simple and with a little elbow grease and knowledge of some crowdfunding basics, it can yield great results. If you haven’t considered crowdfunding as a business model for your product or service, we hope you will do so after reading this article.
Real estate crowdfunding, by definition, involves using the Internet and social media in order to connect investors to property investments.
Equity crowdfunding is when a backer gets a small part of your company’s shares as a reward for their investment.
Absolutely yes, at least in the United States. In other countries, you’ll need to check what the legal limitations are. For example, equity crowdfunding is illegal in India.
While Kickstarter is one of the pioneers, it has gotten some competition as time passed. Now there are different options depending on your needs, such as GoGetFunding, Krowdster, etc.
There are many successful businesses that started with crowdfunding. Some of those include Oculus VR, M3D, Radio Public and many others.
That depends on the type of crowdfunding model you choose for your idea. For example, if you opt for debt-based crowdfunding, you have to pay back your debt to the backers. On the other hand, donation-based crowdfunding is debt-free.
You start by researching “what is crowdfunding and what are its challenges?” Then you need to pick the right platform and ensure you set the funding goals properly. You don’t want to run out of money before your business is actually funded. Finally, always run an honest and well-thought-through marketing campaign.