What is crowdfunding

It’s a way of raising capital by asking a large number of people to individually contribute to a set financial goal. It is utilized to finance organizations’ needs like marketing a new product or funding a project's annual goals. Publicly financing a venture or a business project was not very popular until recently. Alongside the conventional networks of friends, work connections and social media, crowdfunding websites are an increasingly important method for raising the capital needed. These funding sites range from personal needs (medical / trips) to business ventures (products / video games / services). Household brands like "Pebble" and "Oculus Rift" owe much of their success to the capital and popularity driven by their crowdfunding campaigns. The popular video game "Star Citizen" has raised an amazing $74,000,000 through individual donations via kickstarter. Crowdfunding can be an incredible method of raising sufficient capital to fund your product or service.

Crowdfunding has made it easier for organizations to gather important capital for potential projects which until recently, had been a particularly tough job to achieve.

Types of crowdfunding

Simply put, crowdfunding is asking a group of people to donate a defined amount of money towards a specific cause which can be personal, creative or enterprising in exchange for various rewards. Generally, crowdfunding is categorized into three different areas:

  • Equity-based crowdfunding: This is linked with asking the crowd to donate to your business and other financial projects in exchange for equity. www.banktothefuture.com, www.sharein.com, www.crowdcube.com, www.crowdmission.com are some examples of equity crowdfunding.
  • Debt-based crowdfunding: This involves the donation for your business in exchange for financial return. This might also involve the return in the form of interest at a future date. www.trillionfund.com, www.abundancegeneration.com, www.buzzbnk.org, www.banktothefuture.com are debt crowdfunding websites where they credit the investors for contributing to the idea they believe in.
  • Donation-based crowdfunding: This is where the donor will receive intangible products like a t-shirt, website mention, or the finished product once the project is complete in exchange of the financial help. www.sponsorcraft.com, www.gambitious.com, www.pleasefund.us, www.crowdfunder.co.uk, www.kickstarter.com, are donation based crowdfunding websites.

Why utilize crowd funding?

Why do many entrepreneurs favor crowd funding over other options? Statistics suggest that the average successful crowd funding campaign makes around $7,000 and is about 9 weeks long. The funders are of a younger age bracket too, with statistics suggesting that most crowd funders are aged between 24-35. The Worldwide crowd funding volume currently stands above $3,000,000,000. To many, this form of financing is much more advantageous than traditional business loans or giving up large amounts of equity to a single investor. Here are some other reasons organizations need to look at crowd funding.

  • For an entrepreneur, raising capital from accredited investors is not always an easy task. Crowdfunding is the best alternative to fund a venture. This enables interested parties to find your project and invest. This allows inbound funding for those without an extensive list of investors to work through.
  • Apart from sufficient funding, starting a new company has some very steep technical challenges. Crowdfunding campaigns hedge many of these risks and also provides some important business experience to the more novice entrepreneur. The crowdfunding campaign itself can be utilized as a very important form of marketing. It is a very engaging way to build a market for your product while allowing a base to build off of.
  • Crowdfunding will also lend you credibility to convince larger investors as well as yourself on the validity of your venture. Successful campaigns imply that not only a market exists for your product, but that you posses a very eager and motivated customer base.

You will be introduced to prospective loyal customers and these early adopters help to spread the idea behind your project while asking for very little in return.

Site Alexa Ranking Compete Rank Analysis
gofundme 329 334 $720M+ Raised. The general fee is 5% on all payments collected. An additional $0.30 per donation
kickstarter 174 404 $1,583M+ Pledged. Only used for creative/business projects. A 3-5% processing fee is applicable to most projects.
indiegogo 582 615 $170M+ Pledged. The fee is 9% and once the goal is reached, 5% is refunded. $25 for international wire.
teespring 1105 1007 This site is for t-shirt crowdfunding and the processing fee depends on the volume.
youcaring 2979 2722 Crowdfunding for personal needs. Processing fee of 2.9% (paypal).

Things to remember if creating a crowdfunding project:

  • Budget and plan for the promotion - From promoting the crowdfunding page to allowing the purchase of your finished product, organizations must plan it all. While marketing strategies and strong advertising expenditures are necessary, do not forget the power of a very traditional strategy – ‘Word of mouth’, it can work wonders when coupled with social media. Freelance PR experts can help you design the project for the crowd sourced funds.
  • Get your social media channels ready - Facebook, Twitter, Pinterest, Instagram and Tumblr are the top five social media channels to share updates and information about the campaign. Social media profiles also add credibility for the company.
  • Declare the rewards - As you design the rewards make sure they are appealing to the donors. Like-minded people will donate to like-minded projects. Make sure you have complimentary awards and recognition for them.
  • Do not imply unrealistic expectations - Unrealistic expectations are the largest fault found in most of the crowdfunding projects. When expectation levels do not not coincide with the delivered product, the fund raisers lose momentum. You risk losing your most important base by over promising.
  • No spamming - Most people can spot a spam email these days. Do not resort to spamming. Concentrate on increasing Open Rates of your mails. You can try options like MailChimp in your marketing strategy to interact with your audience. In crowdfunding, connecting with your investors is an essential part and tailoring your message is essential to attaining positive feedback. Do not send generic emails.

Category: Funding

About The Author

David Moskovitz

David Moskovitz is a Co-Founder at BrainiUX.

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