What is Crowdfunding?

Learn about Crowdfunding, and different platforms available. Includes information and frequently asked questions about Crowdfunding.

Updated on March 31st, 2020

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Crowdfunding is fundraising that allows anyone to collect money from groups of people in online communities. Individuals can join crowdfunding platforms to communicate the details of their project or venture to the public, who can then help fund it. In 2015, more than $34 billion was generated worldwide through crowdfunding.

Individuals who are ineligible for bank financing, need to raise funds fast without going into debt, or those whose ideas don't seem appealing to investors, might want to start a crowdfunding campaign.

Crowdfunding vs. Traditional Financing:

Traditional funding might entail approaching the bank, external investors, or using personal funds to get an idea, project, or cause off the ground. Conventional funding methods typically involve large amounts of money coming from a few big investors or institutions, with conditions attached to the cash received.

It might be difficult to find investors and securing a loan can take time, and it involves risks, while crowdfunding allows individuals to connect directly with large audiences while maintaining control over their projects and ideas.

Types of Crowdfunding:

  • Donation-based: Donation-based crowdfunding involves asking the public to donate to a cause, business idea, or project. Funders who donate should understand that their money will not be reimbursed if they contribute.

  • Rewards-based: Also called seed crowdfunding, rewards-based crowdfunding is typically used to raise capital for small businesses. Rewards are decided by the owner; it can be anything from vouchers for products and services, to a simple thank-you card in an email.

  • Equity crowdfunding: Sometimes called investment crowdfunding, equity crowdfunding allows funders to claim shares in your business. This means they may be entitled to some of your profits, share your risks and losses, and may also have a say in certain business decisions.

  • Debt-based: Also known as peer-to-peer lending, debt-based crowdfunding can be used by individuals or businesses requiring a loan. This is a good option if you've been unsuccessful in securing a bank loan. Debt-based crowdfunding is similar to a regular loan, but the exact terms may differ between platforms. Collateral may also be required.

  • Royalty-based: This is a good option for business owners who are reluctant to give up equity. Royalty-based crowdfunding offers a percentage of the generated revenue to those that have helped fund the business, but it does not make them shareholders.

How to Launch a Crowdfunding Campaign:

Before you register with a crowdfunding platform, you need to have a good grasp of what your business idea, project, or charity cause is. Conduct your market research, speak to topic or field experts, develop a proposal or business plan along with relevant statistics, and make sure all of this information is available on your website. Once you have done this, you can follow these steps:

1. Tell a compelling story.

Share your project proposal or business idea with the public in a way that resonates with them. You can film a short video that communicates your goals and plans to potential funders. Make them believe in you, and always ask yourself, if you were in their position, would you be willing to spend your hard-earned cash on this cause? If the answer is yes, you are off to a good start.

2. Reward those who back you.

Think carefully about what your funders will get in return for contributing to your crowdfunding campaign. If you are hoping to bring a product to market, provide vouchers or special discounts to your funders, or if you are collecting donations for a cause, be sure to mention the donors' names in an email or on the website. The rewards you offer don't have to be extravagant. Sometimes a simple thank-you card is all it takes.

3. Set your goals and update your funders regularly.

Before you start a crowdfunding campaign, you need to have the end goal in mind. Putting an update banner on the top of your page, or perhaps a timer, stating how much time you have left to reach your target, might move your funders to action.

Some platforms also have an all-or-nothing policy: if you don't meet your goal, you'll have to forfeit all the funds you've accumulated - be sure to remind your funders of this. Posting regular updates is also essential. Integrate social media into your campaign and have a few live streaming sessions where you update your funders and encourage them to spread the word. It is important to stay connected to the people who believe in your ideas.

4. Look for new ways to promote your campaign.

Creating a strong online presence and increasing the visibility of your campaign, might attract more funders. Partnering with influencers and bloggers could give you more exposure as well. Competitions and live events may increase the excitement around your project, and having a tiered funding structure, where more donations equal greater perks, could be a useful incentive, too.

5. Make people believe in your product and always listen to your critics.

It's important to have a great backstory, but it's even more important that you have a fantastic product, service, or cause. Take note of the criticism you get. If your potential funders don't think your idea is good enough, you might have a hard time selling it to the public. It's easier to fix an idea than get your money back for 1,000 units of a product that does not work.

6. Deliver on your promises.

Your work doesn't end now that you've reached or exceeded your crowdfunding goal. Keep track of all the promises you've made. If you promised all your funders free treatments at your spa, or a batch of triple chocolate cookies once your bakery was up and running, then you have to get these delivered to them as soon as possible. You cannot start your new venture by creating bad relationships with the people who backed you. Treat them well, so they will continue to support you, and encourage their friends to do the same.

When does Crowdfunding not work?

Crowdfunding may seem like a great way to generate startup capital, but there are certain exceptions to the rule. Your campaign might not work if you've ticked one or more of the following items:

  • Your ideas are incomplete: When you have failed to do the required market research or you haven't pitched your project properly, potential funders are less likely to support you. Make sure your project is legal and marketable.
  • Your customer service skills are lacking: You may not be running a business yet, but you still need to know how to handle queries. Be prepared to answer a range of questions and be sure to follow up later if you don't have the answers available on hand.

Pros and Cons of Crowdfunding:

Pros

  • With thorough research and planning, your crowdfunding campaign can reach a huge audience without you having to spend too much money.
  • You can reach and exceed the financial targets you have set.
  • You can market yourself without the help of a team.
  • You can raise funds quickly, without all the hassles and red tape of traditional fundraising.

Cons

  • Crowdfunding can be time-consuming and you have to be prepared to engage with hundreds of potential funders. This is a lot of work if you're doing it on your own.
  • Depending on the policy of the crowdfunding platform, you might lose all your accumulated funds if you fail to meet your goals.
  • Communicating your ideas to the public may provide existing competitors with valuable information, or spark new competitors.
  • If your product or idea is too complex for a layperson to understand, your crowdfunding campaign is more likely to fail.

Protect your ideas and inventions:

Crowdfunding platforms do not offer any intellectual property protection. Make sure you take out a patent as soon as possible. Also ensure you have read all the terms and conditions of the crowdfunding platform you choose. Find out more about how you can protect yourself and your work.

How to get the most out of your Crowdfunding campaign:

Crowdfunding is hard work, but the payoff can be great. Listed below are 10 points you should keep in mind as you start your crowdfunding campaign:

  • Plan thoroughly and don't skimp on the market research.
  • Invest time in creating a strong online presence through social media.
  • Have a good rewards program.
  • Have meaningful engagements with your potential funders.
  • Answer all questions thoughtfully.
  • Create interest around your campaign before you start asking for money.
  • Constantly work on your promotional strategies.
  • Communicate with your funders and the general public.
  • Post regular updates to remind your funders of the impact their hard-earned money will be making.
  • Add a personal touch wherever you can.

FAQs:

How do I make money with Crowdfunding?

Creating a powerful story around your business idea, cause, or project will help you attract funders. Posting updates and having meaningful engagements with your followers will also keep people invested.

Do I have to pay back the money earned through Crowdfunding?

It depends. If you have opted for debt-based Crowdfunding or peer-to-peer lending, then yes, you will have to pay back the money. Some sites also subscribe to an all-or-nothing system, which means you will forfeit all the funds you have raised unless you meet the goals you've set. Carefully read the terms and conditions of the platform you've registered with, and make sure you tell potential funders whether or not they can expect to be repaid the money they have invested in your project.

How do I withdraw money from my Crowdfunding campaign?

You should be able to link your bank account to the Crowdfunding campaign, but different platforms have different conditions attached. Make sure you read through them all before deciding on the best option for your campaign.

Can you use Crowdfunding to pay off your debt?

Yes. You can use Crowdfunding to help pay off your personal debt, but make sure that your funders know the money they're investing will be used for a debt repayment campaign. If your story resonates with the right audience, you could raise enough money to write off your debt.

Can I start a business with Crowdfunding?

Yes. You can raise startup capital with a Crowdfunding campaign.

How do I integrate social media platforms into my Crowdfunding campaign?

You can set up accounts for your campaign on Facebook, Twitter, Instagram, and Snapchat, and link them to your Crowdfunding page. The way you decide to use these platforms in your fundraising efforts is up to you. Some of them may not work for your particular campaign, so do some research before you decide.

Is Crowdfunding a donation or an investment?

There are donation-based types of Crowdfunding, where your funders won't get anything in return for their contributions, but they are also other types, like equity, rewards, and royalty-based Crowdfunding, where your funders will get something back. Be sure to clearly outline the nature of your Crowdfunding campaign to avoid any disappointments or unnecessary confusion.

When does Crowdfunding not work?

Crowdfunding can be unsuccessful if you are trying to raise money to develop software or a mobile app, if the idea you have seems unfeasible or incomplete, or if you lack the communicative skills to keep your funders invested in you.

What are the best Crowdfunding platforms?

  • Kickstarter.
  • Indiegogo.
  • GoFundMe.
  • RocketHub.
  • Patreon.
  • LendingClub.
  • CircleUp.