Crowdfunding

Crowdfunding

Crowdfunding is a way for entrepreneurs to fund their business or product development by collecting small contributions from many people. Social media networks enable people with business ideas to reach a sizeable audience who can choose to support the venture with as much or as little as they want, often in exchange for some kind of reward.

Crowdfunding can also be used by existing businesses that need money to grow or avoid bankruptcy as well as to raise money for charitable causes, personal needs (such as medical bills), political campaigns, or almost anything else.

How It Works

Get an idea.

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Determine how much money you need to be successful.

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Pick the site you want to use.

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Fill out the online form, and set your fund-raising goal.

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Launch your campaign.

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Promote your campaign online through social media, email, and even contacting local media.

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Receive donations big and small from many different people.

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Keep promoting. Never stop promoting.

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Hit your goal.

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Use the money to bring your idea to life!

Crowdfunding vs. Traditional funding

• Much Easier

The traditional way to fund a new business with outside capital often requires a formal business plan, market research, projections for revenue, or initial traction. An aspiring entrepreneur would then have to convince angel investors, investment firms, financial institutions offering new-business loans, or wealthy individuals to invest in their venture. This process can be very competitive and difficult.

• Lower Risk

Getting funding the traditional way is also difficult because there is a major risk to the investors. An investment firm often invests hundreds of thousands, even millions of dollars in a new business. If it fails, that money is lost. With crowdfunding, the financial burden and risk are spread out. If the business fails, each investor only loses what they put in, which can be as little as $10.

• The Sky’s the Limit

Crowdfunding’s limited risk also means there’s more room for innovation. Traditional sources of business funding are often unwilling to branch out into untested areas because of the risk of failure. When each investor is only contributing a small amount, they are more likely to risk their investment on something completely new. The payoff for funding something revolutionary is quite significant, while the downside risk is minimal.

Types of crowdfunding

Equity Based Individuals contribute larger amounts, usually $1,000 or (much) more in exchange for an ownership stake. Investors don’t get a reward but will own a piece of the company they’ve funded, which may appreciate in value as the business grows. Often used to fund the creation of a new company or the expansion of an existing one. Not used for charities or creative endeavors.

Reward Based Individuals contribute small amounts, usually $1–$1,000 in exchange for increasingly valuable rewards. Often used for product-focused or artistic campaigns. Great for campaigns that allow the investor to feel connected to the project in some way. The reward for larger donations is often the product being funded (e.g., a watch, book, new gadget) or tickets to view the artistic endeavor (e.g., play, art show).

Lending Based Individual lenders contribute medium to large amounts in exchange for the promise of repayment, plus interest. Much like borrowing from a bank but with many smaller, private loans. A popular type of peer-to-peer (P2P) lending, though not all P2P is done through crowdfunding sites. Can be used to fund personal needs but primarily used to raise funds for existing companies or start-ups that don’t want to give up any ownership rights.

Donation Based Individuals contribute small amounts, usually $1–$1,000. There is no reward other than the gratitude of the beneficiary. Often used to raise funds for personal needs (e.g., medical bills, legal fees), political campaigns, charities, or other nonprofit organizations. Donors may receive a tax deduction for their donation if the beneficiary is a registered charity.

Pros and Cons of Crowdfunding

Best practices

• Hone Your Product—Be sure the product you’re selling (or cause you’re raising money for) appeals to a large portion of the population that you’ll be able to reach online.
• Do Your Homework—Research what makes successful campaigns with similar products work. Think about what questions investors may have, and prepare your answers ahead of time.
• Have a Plan—Establish a timeline with clear goals for interaction and fund-raising. Plan to spend 30–60 days on preparation before you launch. Jumping into a campaign without proper preparation is rarely a successful strategy.
• Tell A Story—Typically, campaigns that appeal to people on an emotional level or products that promote a certain lifestyle narrative are more likely to get attention.
• Provide Incentives—People love prizes. Set up a tiered system of rewards for investors based on the size of their investment. Then follow through by sending rewards in a timely manner.
• Set a Realistic Goal—If you don’t hit your goal, you might not get paid. Set a realistic goal. Most successful campaigns have goals of $10,000 or less.
• Get Ready to Work—Accept that you’re going to have another full-time job before and during your campaign. You get out of a campaign what you put in, and you’ll be competing with thousands of other campaigns for attention and contribution. Convincing people to contribute to your product or cause will require some serious legwork, so be prepared to sacrifice some of your free time for a while.

Popular sites

Kickstarter

• Most popular, well-known crowdfunding site
• Best for arts, music, crafts, design, and other creative categories
• Requires rewards for investors
• Doesn’t pay unless you hit your goal
• Fees: Site takes 5%; payment processor takes 3%–5%

Indiegogo

• Good for any kind of fund-raising, all categories
• Requires rewards, or “Perks,” for investors
• Still pays if you don’t hit your goal but charges a higher fee
• Allows both flexible (if any amount of money will help) and fixed (if you need a certain amount) goals
• Fees: Site takes 4% for a successful flexible goal campaign, 9% for an unsuccessful one. Site takes 4% for a successful fixed goal campaign, zero for an unsuccessful one.

RocketHub

• Specifically for projects in art, business, science, and social categories
• Partnered with A&E channel, some crowdfunding campaigns are selected to be featured on the show Project Startup
• Still pays if you don’t hit your goal but charges higher fees
• Fees: Site takes 4% if you hit your goal, 8% if you don’t. The payment processor takes an additional 4%.

GoFundMe

• More for personal fund-raising, such as raising money for medical bills or to help a local business grow
• Doesn’t pay unless you hit your goal
• Fees: Site takes 5%; payment processor takes 2%–3%

Summary

• Crowdfunding is a way to raise funds from many people using social media.
• It can be used for any kind of project or cause, e.g., creative ventures, start-ups, new products, charities, political campaigns, or personal needs.
• There are four types of crowdfunding: equity based, lending based, reward based, and donation based.
• Successful crowdfunding is hard work, so you need to be sure you have a good product and a realistic game plan before you start.
• Kickstarter is the most popular crowdfunding site, but many other sites are available with different terms, fees, and campaign focus.