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.
Determine how much money you need to be successful.
Pick the site you want to use.
Fill out the online form, and set your fund-raising goal.
Launch your campaign.
Promote your campaign online through social media, email, and even contacting local media.
Receive donations big and small from many different people.
Keep promoting. Never stop promoting.
Hit your goal.
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
Pros and Cons of Crowdfunding
|Limited risk to each investor||Labor intensive, requires social networking and self-promotion|
|Unlimited fund-raising potential—many campaigns raise far more than their goal||Crowdfunding sites typically take a cut|
|Access to a large pool of potential investors (i.e., everyone)||If you don’t hit your goal, you may not get paid|
|Automatic customer base—investors want to see the business succeed and are likely to purchase products||Time consuming, both before and during (constant social media interaction, sending rewards to contributors, contacing potential investors and the media to create buzz)|
- 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.
- 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%
- 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.
- 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%.
- 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%
- 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.
- The “Most Funded” Kickstarter campaign was in 2015. Nearly 80,000 people contributed more than $20 million to fund the development of a smartwatch called the Pebble.
- Friends, friends-of-friends, and friends-of-friends-of-friends are the primary sources of campaign funding. Most successful campaigns raise 25%–40% of their goal from these connections.
- Kickstarter is the most popular crowdfunding site, with more than $2.5 billion in pledges since it launched in 2009.
- Two of the craziest items funded on Kickstarter include Crystal Bacon (just a piece of clear plastic that looks like bacon) and $1,050 to fund the purchase of a Chipotle burrito.
- In crowdfunding, women outperform men. All else being equal, women are 13% more likely than men to be successful in raising money on Kickstarter.
- Crowdfunding has eclipsed the National Endowment of the Arts as a source of funding for the arts.