Crowdfunding

Crowdfunding: A Complete Manual for Understanding the Concept and How It Works

Crowdfunding is now a very common means by which entrepreneurs, artists, and even non-profit causes raise funds for their business or project. Following the emergence of digital platforms, crowdfunding has made fundraising more democratic, with greater ease of access to financial support for individuals or organizations. In this blog, we will demystify crowdfunding, its functionality, various types, and how you can use this method to finance your next project or cause.

1. What is Crowdfunding?

Crowdfunding involves the collection of little money from numerous individuals, commonly through the use of the internet. Crowdfunding is the manner in which people, startup ventures, organizations that are nonprofit in nature, as well as artists, receive funding to meet needs, initiate production, or become aware of their causes.

Crowdfunding platforms such as Kickstarter, GoFundMe, Indiegogo, and Patreon make it a common practice for people to invite funds from crowds of people.

The individuals who make contributions are sometimes referred to as “backers,” and they can be rewarded with rewards, equity, or even simply the satisfaction of assisting in funding a project.

2. How Does Crowdfunding Work?

The process of crowdfunding can be divided into a number of important steps:

• Step 1: You develop a strong project or concept that needs financing. It could be anything from introducing a new product, opening a business, financing a creative endeavor (such as a movie or book), or funding a cause for charity.
• Step 2: You select a crowdfunding website that best suits your project. Every site has its own strengths and niches (e.g., Kickstarter for creative projects, GoFundMe for individual causes).
• Step 3: You determine a goal amount and timeline for raising money. You’ll also specify the rewards or bonuses you’re giving to supporters.
• Step 4: You raise awareness for your campaign on social media, by email, via press releases, and by word of mouth in order to pick up steam and bring in backers.
• Step 5: When the funding cycle closes, you either get the money (if you’ve successfully reached your target) or pledges are refunded (according to the rules of the platform).

3. The Various Types of Crowdfunding

Crowdfunding is not a single-fits-all approach, and there are a number of types you can select from depending on your requirements:

a. Donation-Based Crowdfunding

• This form of crowdfunding is where people give money to a project or cause without receiving anything in return.
• It’s generally utilized for charitable purposes, personal crises, medical bills, or community-based projects.
• Platforms: GoFundMe, JustGiving

b. Reward-Based Crowdfunding

• In reward-based crowdfunding, backers invest money in return for rewards or incentives, which are usually tied to the project.
• This model is commonly employed by creators and entrepreneurs who provide backers with early access to products or limited-release merchandise as rewards.
• Platforms: Kickstarter, Indiegogo, Patreon

c. Equity-Based Crowdfunding

• Equity crowdfunding enables backers to invest money in return for equity or shares in a company.
• This model is employed mainly by startups and companies seeking investors who are ready to take a share in the company in exchange for their funding.
• Platforms: SeedInvest, Crowdcube

d. Debt-Based Crowdfunding (Peer-to-Peer Lending)

• Here, backers lend money to a person or company with the hope of receiving repayment with interest in the future.
• It’s generally employed by small businesses or individuals who want to borrow money without having to go through traditional financial institutions.
• Platforms: LendingClub, Prosper

4. Why Crowdfunding?

Crowdfunding provides a variety of advantages that make it an attractive option for raising funds, whether for a product, business, or cause:

a. Low Barriers to Entry

• Crowdfunding enables any individual with a good idea to raise capital. You don’t have to be a large corporation or have an extensive group of investors to get started.
• It provides opportunities for entrepreneurs, creatives, and others who might not otherwise have access to more traditional sources of funding such as bank loans or venture capital.

b. Validation of Ideas

• Running a crowdfunding campaign can be an excellent way to validate your product or idea before investing time and money into development.
• If your campaign garners interest and reaches its funding goal, it signals that there is demand for what you’re offering.

c. Building a Community

• Crowdfunding can help you build a loyal community around your project or business. Backers become invested in your success and are likely to become your first customers or supporters.
• The engagement and excitement generated during the campaign can also help spread the word about your project, giving you organic exposure.

d. Flexibility and Creative Freedom

• Unlike other traditional sources of funds such as venture capitalists or banks, crowdfunding does not subject you to loss of creative control of your project.
• You’re not obligated to serve the interests of lenders or investors, which translates to more risky and innovative ventures.

e. Access to Marketing Tools

• Most crowdfunding sites have in-built marketing tools that make it easier for you to access potential supporters. You can simply post your campaign on social media, create newsletters via email, and access the platform’s pool of users to expand your base.

5. The Risks of Crowdfunding

Even with its numerous advantages, crowdfunding also has its challenges and risks:

a. No Guarantee of Success

• One of the largest risks of crowdfunding is that there is no guarantee that you will achieve your funding target. If you fail to meet the target, you won’t get any money (in the case of all-or-nothing campaigns).
• This can be particularly infuriating if you’ve already spent time and effort on your campaign.

b. Public Scrutiny

• Crowdfunding sites expose your campaign to the public, and you will frequently be criticized or questioned by backers, particularly if there are setbacks or if the project fails to live up to expectations.
• You must control your backers’ expectations and keep them informed to prevent harming your reputation.

c. Fees and Costs

• Crowdfunding sites typically charge a fee for their service, which can be between 5% and 10% of the amount raised.
• Also, there are payment processing fees involved, so you should factor these in when determining your funding goal.

d. Intellectual Property Risks

• Crowdfunding makes you open up your idea to the public, which can leave you vulnerable to intellectual property risks. If your idea is not patented or copyrighted, then others might steal or copy it.

6. Tips for Running a Successful Crowdfunding Campaign

If you choose to fund your project or business through crowdfunding, here are some tips for ensuring your success:

• Create a Compelling Story: Your campaign must be a clear, compelling story about why your project is important and how backers will gain from supporting it.
• Set a Realistic Funding Goal: Ensure that your goal is realistic and achievable. Overestimating your requirements may deter potential backers.
• Give Imposing Rewards: Make sure rewards you provide are appealing and pertinent to your backers’ interests. Special items or early-bird offers can prove to be marvelous incentives.
• Entice Your People: Keep your backers informed on a regular basis. Trustworthiness and higher contributions are increased by regular interaction.
• Harness Social Media: Harness social media portals to publicize your campaign and invite others to share it within their circles.