Crowdfunding is when businesses, organizations or individuals fund a business without traditional means with small donations from many people. By receiving the necessary boost to cash flow, these ventures can get off the ground or launch new projects. Most of these campaigns happen via internet platforms, have set time frames for when money can be raised and disclose specific monetary goals.
There are four kinds of crowdfunding campaigns you can use for your business. With donation-based funding, contributors give money without receiving anything in return. In equity funding, backers get shares of the business. For debt-based funding, donors are repaid with interest. With reward-based funding, contributors receive tokens, products or services in return for their donations.
While there are four types of crowdfunding, each receives money from interested donors. Here’s a breakdown of each one:
There are many online crowdfunding platforms you can use to kick off your business. Here are four of the top crowdfunding sites you can use to grow your company.
Kickstarter is a rewards-based donation platform that has been helping companies raise money since 2009. It has been used to raise more than $5 billion for more than 182,000 projects. Part of what makes Kickstarter so successful is how simple the site is to use. You set a monetary goal and the amount of time you want to reach it, and tell your campaign’s story. You then share your project with the community in hopes of finding backers.
GoFundMe is a donation-based crowdfunding company, and although it’s famously used for more charitable initiatives, businesses can take advantage of the platform as well. This is a great option for nonprofit organizations and businesses that have service-based initiatives. Statistically, 1 in 10 campaigns is fully funded on the site.
LendingClub is a debt-based crowdfunding site because it is a P2P lending platform. It offers up to $40,000 in personal loans and up to $500,000 in small business financing. Each loan term is three or five years. To qualify, your company needs to have been in operation for at least a year, the applicant must own at least 20% of the business, and it must have an annual sales revenue of $50,000.
Indiegogo is a reward-based platform that offers two kinds of funding. Fixed funding allows you to set a goal for a certain amount of money, and if you don’t reach your target, all funds are returned to donors. Flexible funding is when you’re looking for any amount of monetary support, all of which you can keep whether you hit your goal or not.
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Most crowdfunding sites have specific rules. Kickstarter, for example, doesn’t allow equity crowdfunding and has a list of prohibited items that you are not allowed to include in your project. It’s wise to read these rules thoroughly before choosing a platform so you don’t have to halt your campaign before it even starts.
If you ignore the rules and jump into your crowdfunding campaign, the likelihood of success plummets. You need to adequately research the different crowdfunding sites so you understand which platform works best for your business.
Many individuals assume crowdfunding is an easy or free way of making money, but it requires a lot of effort to establish a project that backers will perceive as a valuable service. Success isn’t guaranteed, and as crowdfunding continues to gain popularity, backers have become shrewder in the projects they support.
“Crowdfunding works for all kinds of companies at all different stages, but the companies that have the most successful campaigns tend to have the largest and most engaged communities behind them – usually of customers or users or other supporters of their mission,” said Kendrick Nguyen, CEO and co-founder of crowdfunding platform Republic.
Generating this type of widespread support can be a challenge. It takes a strong marketing effort, trustworthy founders and a quality product. According to Ryan Sim, managing director and co-founder of We The People – a company that sells only crowdfunded products – the challenges of crowdfunding are extensive. He listed five key challenges that plague reward-based crowdfunding campaigns:
“It’s important to note that these challenges are just the start of the obstacles to consider when creating a crowdfunding campaign, “said Sim. “In addition to typical ones, every creator will have his own challenges that are very unique to his or her business.”
Other challenges also arise in equity crowdfunding. According to Connor Young, founder and CEO of Ample Foods, equity crowdfunding requires more emphasis on educating potential investors who don’t necessarily have an investment background.
“We’re all so used to buying products online, so investing in a regular crowdfunding campaign is quite easy,” said Young. “You just say, ‘Oh, OK, I’m basically prepurchasing a product that doesn’t exist yet, and I’m going to get it in six to 12 months.’ That’s pretty easy to understand. But for a person who’s not actually used to investing into companies – they’re not a typical angel investor – equity crowdfunding naturally has more resistance.”
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It takes a lot of work to run a successful crowdfunding campaign; launching one doesn’t guarantee success. It’s important to make sure your marketing message is well thought out and to find cost-effective methods to promote your campaign and reward backers.
Investors have a lot to gain from putting their money into crowdfunding campaigns.
Investing in projects through crowdfunding sites is easy, with flexible and direct payment options. Investors can use crowdfunding to diversify their portfolios.
There’s no one-size-fits-all approach to crowdfunding, but there are three key places to start on your road to crowdfunding success.
Young stressed the importance of being transparent with backers throughout the process, even after the campaign ends. He explained that nearly every product launch experiences delays, so you have to expect things to go wrong and react with honesty and transparency.
“A lot of it is simply ‘do you have good communication with your backers, even when things go wrong?'” Young said.
Toward the close of the campaign, it’s often good to update the community, explaining where to reach you next and whether you plan on shifting focus to preorders through your own website.
Don’t be shy about keeping your backers in the loop once the campaign ends. A successful crowdfunding campaign centers on fostering relationships with supporters.
A good batch of marketing materials will help your campaign stand out.
“It’s about making an emotional connection with someone just as much as it is about actually explaining what the product is,” Young said. “One of the really big reasons why someone invested in the first place to Ample was simply because they thought that I was an authentic guy and that I really seemed to care and be passionate about it.”
With new crowdfunding campaigns launching daily, it’s important to make your campaign stand out from the others. Creating strong marketing materials and spreading the campaign through your network tend to be the best ways of gaining recognition. Ample used a brief video to explain its product during its first crowdfunding campaign.
For the best crowdfunding results, prepare for the campaign before launching it. Spread the word to your family and friends that you’re going to launch the campaign. Be active on your personal and company social media accounts prior to the launch. Give potential backers every chance to find you.
Creating the proper marketing materials also takes time. Don’t try to film an educational video the day before the campaign starts; give yourself time to get it right. Taking a few extra weeks to develop a plan and build excitement around the campaign can help you hit your crowdfunding goal.
To reach your funding goal, you must do more than launch a crowdfunding campaign for your project. Market to your base before and during your campaign, and provide updates on your business’s progress to develop a relationship with your backers.
Not all projects succeed. Few of them even obtain significant levels of funding.
Many projects with excellent ideas end up failing, whereas others with simple premises flourish beyond all expectations. Crowdfunding projects tend to follow a viral method of growth and, as such, are quite unpredictable without the proper marketing.
“One of my favorite investment campaigns on [Republic] to date was RadioPublic,” Nguyen said. “They’re kind of like SoundCloud for podcasts and have investors like The New York Times, the parent company of WordPress and the Bose Corporation. They raised just under $150,000 from some of their most passionate users and listeners. To me, their trajectory is similar to Gimlet Media’s – they ran a $200,000 equity crowdfunding campaign in 2014 and were just acquired by Spotify this month.”
Another company that ran a successful campaign is Peak Design, which set a goal to raise $500,000 on Kickstarter for its Travel Tripod product. The campaign lasted 56 days and had 27,168 backers, raising $12.1 million.
The success of your crowdfunding campaign depends on your ability to capture the interest of many people and build a relationship with your base.
Once your crowdfunding campaign closes, one of three things happens:
While crowdfunding does not guarantee the success of a project or the longevity of a company, it helps many entrepreneurs gain business experience and create relationships for other opportunities.
Crowdfunding involves collecting money from a group of donors in an effort to raise capital. Crowdfunding sources can include those who have an interest in your business: friends, family members, investment groups and personal investors. The goal is to attract a large group to your investment to raise the capital you need for your business venture. Crowdfunding typically occurs online through dedicated platforms.
Donation crowdfunding does not require the recipient to pay back the funds. This type is typically more geared to charities and nonprofits. Friends and family members are likely to not expect a return of their funds. Debt-based donations comprise money pledged by backers that is a loan, which you must repay with interest. With rewards-based crowdfunding, tangible items, like free products, are given to individuals who give money to help you start your business. You could structure your rewards based on the size of the donation. For equity crowdfunding, participants receive a financial reward for their investment by owning shares of your company.
There are both pros and cons of raising capital through crowdfunding. The following are the advantages of using the strategy:
The following are drawbacks to consider before launching a crowdfunding venture:
If you don’t hit your funding goal, the crowdfunding platform usually returns the money to donors, though some sites let you keep the funds for a fee. Be aware of any processing and hosting expenses as well.
Bennett Conlin and Ryan Goodrich contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.