blog | 9min Read
Published on November 14, 2022
What does crowdfunding mean? Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, in modern times typically via the Internet. It is a way of collecting money in order to start a new project, for volunteering and helping purposes, and anytime when there is need of money. People often associate crowdfunding with money generated to help the poor, or provide any kind of support. However, crowdfunding is a practice that goes beyond it, as unicorns and known companies also use crowdfunding as a source of money generation. It is not always out of need that people need to crowdfund but like the name suggests, help from the crowd in order to fund you for your upcoming project/move/step etc.
It is very apparent in our society that people associate this term with ‘dire need of funds’ and is something undertaken by the poor or people who are unable to afford something for themselves or their families. Well, that is a myth, because today biggest multinational companies like Google, Vodafone and Philips also use crowdfunding to generate money for the business, in order to take up new ventures and projects within google.
Perhaps, everyone is moving in the crowdfunding ecosystem. To state, google was among the first large companies to spot the potential of online crowdfunding exchanges. Last year, the internet search group co-sponsored a competition for entrepreneurs in Germany, called the Gruender-Garage, run on the US-based peer-to-peer lending platform Indiegogo. Contestants were offered up to €10,000 each in match funding from Google, if they could hit their own business funding targets on Indiegogo.
Ralf Bremer, Google’s public affairs manager in Germany, says this approach brings the company closer to technology developers. “We want to expand our relations and grow roots with the German start-up and innovation sphere,” he explains. “We want to invest in Germany’s future success as the internet’s innovation culture helps economic growth and jobs.”
Moreover, it has been noticed that crowdfunding campaigns help build connections and engage with the customer is a more compelling proposition than signing cheques. It can encourage small investors, too. “Contributors to these campaigns can also feel like they, along with the brand, are helping something creative, entrepreneurial, or social come to life.
Types of crowdfunding?
There are four types of crowdfunding that exist and each of these receive money from interested donors. The 4 types of crowdfunding are the following:
- Donation: Donation-based crowdfunding is when the crowd gives a campaign, business or person money for nothing in return, as a form of charity or helping the needy. For example you create a crowdfunding campaign to purchase new machinery for your business. The people who give you money do it out of help and support for the growth of your business and ask for nothing in return.
- Debt: Debt-based donations are peer-to-peer (P2P) lending, which is a form of crowdfunding. In debt-based donations, there is a debtor and debt collector. The debt collector gives the lump sum money to the debtor who is ought to repay the loan with an interest charged on it, within a given time. t
- Rewards: This is when donors get something in return for the donations they have made for the firm. The rewards are varying depending on the size of the donation, which incentivizes higher contributions. For example, in some crowdfunding campaigns like cancer walks you pay a sum of money and in return you receive a T-shirt, or other products often at a discounted rate.
- Equity: While some crowdfunding campaigns don’t allow backers to own a portion of the company they’re supporting, equity-based crowdfunding allows small businesses and startups to give away a portion of their business in exchange for funding. These donations are a type of investment, where participants receive shares in the business based on how much money they contribute.
Examples of successful crowdfunding sites
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.
The challenges of crowdfunding
Crowdfunding is often misunderstood as a quick and painless way to amass wealth, but in reality, it takes significant time and effort to build a project that investors will see as providing them with a valuable service and therefore be willing to back it. This is analogous to making a presentation to a group of potential investors about a business proposal. There is no assurance of success, and as crowdfunding grows in popularity, backers have learned to be more selective in the projects they fund because they, too, have financial limitations.
According to Kendrick Nguyen, CEO and co-founder of crowdfunding platform Republic, “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.”
Acquiring such widespread backing can be a formidable challenge. Successful businesses are the result of diligent marketing, reliable founders, and a superior product. Crowdfunding presents a wide range of difficulties, as stated by Ryan Sim, managing director and co-founder of We The People, which sells only crowdfunded products. Problems with reward-based crowdfunding campaigns that he outlined include the following:
- Identifying and employing a low-cost marketing approach before, during, and after the campaign.
- Making sure that the campaign description contains compelling language to increase sales.
- Making an engaging campaign video that details the features and benefits of the product (the main difficulty being the high cost of doing so)
- Designing a rewards programme that will yield the highest possible return on investment
- Identifying the best and most affordable method of reward fulfilment
When launching a crowdfunding campaign, “it’s important to note that these challenges are just the beginning of the obstacles to consider,” warned Sim. Every entrepreneur faces difficulties that are specific to his or her industry, in addition to the more general ones.
When it comes to equity crowdfunding, there are additional difficulties to consider. Equity crowdfunding, says Ample Foods CEO and founder Connor Young, necessitates a greater focus on educating potential investors who may not have a traditional investment background.
According to Young, “investing in a regular crowdfunding campaign is quite easy” because of everyone’s familiarity with online shopping. “You simply respond, ‘Oh, OK, I’m essentially pre purchasing a product that does not yet exist, and I’m going to get it in six to twelve months.’ You shouldn’t have any trouble grasping that. However, equity crowdfunding is met with more resistance from the average person who is not used to investing in companies.
Crowdfunding benefits for investors
Crowdfunding campaigns offer substantial returns for investors.
- Crowdfunding presents an opportunity for investors with a low barrier to entry. Since it is not a part of the financial market, it is immune to fluctuations in the economy and the stock market.
- Putting money into a crowdfunding effort is simple. Direct online investment into a venture or business is now possible.
- By contributing to multiple equity crowdfunding campaigns, investors can diversify their holdings and increase their exposure to new opportunities.
Tips for crowdfunding success
There is no magic bullet for crowdfunding, but there are three essential steps to take in the right direction.
1. Communicate with backers.
Young emphasised maintaining open communication with donors after a campaign has ended. He said that delays are common during product launches, so it’s important to be prepared for them and respond openly and honestly when they occur.
“Do you keep in touch with your investors, even when things go wrong?” is a key question. When asked, Young responded.
At the end of the campaign, it’s a good idea to give the community an update, letting them know how to get in touch with you and if you have any plans to switch over to preorders on your own website.
Do not be hesitant to keep your backers informed after the campaign ends. Relationship building with backers is crucial to the success of any crowdfunding campaign.
2. Disseminate interesting and pertinent promotional materials.
A good batch of marketing materials will help your campaign stand out.
Making an emotional connection with a customer is as important as explaining the product’s features, according to Young. Investors believed that “I was an authentic guy and that I really seemed to care and be passionate about it,” which was a major factor in their decision to back Ample.
There are always going to be a lot of crowdfunding campaigns competing for attention. The most effective strategies for getting your name out there involve making compelling promotional materials and getting your network to support the cause. During its first crowdfunding campaign, Ample used a short video to introduce its product.
3. Prepare for the campaign.
Successful crowdfunding campaigns start with careful planning. Tell everyone you know that you will be starting the campaign. Before the release, make use of your personal and company social media accounts. You should make it easy for potential donors to find you.
It also requires time to make the right marketing materials. Don’t rush to shoot that instructional video the day before the campaign launch; give yourself time to get it right. If you want to succeed at crowdfunding, it’s worth taking a few extra weeks to plan out your strategy and generate buzz about the campaign.
Concluding a campaign
Once your crowdfunding campaign closes, one of three things happens:
- If the funding goal was not met, the campaign’s backers would receive a refund. If your crowdfunding campaign does not succeed in reaching its funding goal, you may still be able to collect the money you have already raised on some platforms.
- Your total fundraising amount, less any applicable processing fees, will be transferred to you upon completion of the campaign. In the case of Kickstarter, fees range from 5% for hosting the campaign to 5% plus a percentage of the total for payment processing. Successful crowdfunding campaigns only; campaigns that don’t make their target won’t be charged.
- Equity crowdfunding campaigns are different in that you still have obligations to your backers after the campaign has ended. The outcome of the donations will determine the extent of that duty.
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.