What Is Crowdfunding?
Crowdfunding is defined as raising money for a project or venture by taking in small donations from a large number of people. Typically, crowdfunding campaigns involve using the internet to raise these donations, and the practice of crowdfunding is one that can be directly linked to the growth of the world wide web.
In fact, the very first example of crowdfunding took place in 1997 when the British rock band Marillion used online donations from fans to fund their reunion tour. Since then, a number of platforms designed to facilitate the crowdfunding process have been established, including popular crowdfunding sites such as GoFundMe, Kickstarter, and Indiegogo.
How Does Donation-Based or Rewards-Based Crowdfunding Work?
Unlike many types of startup funding, crowdfunding does not necessarily entail selling equity in exchange for capital. Donation-based crowdfunding entails offering products or services in exchange for crowdfunding donations. If you are trying to fund a company that will sell a new type of gardening tool, for instance, you can create your crowdfunding campaign so that anyone who donates a specified amount will receive the new tool when it hits the market.
Of course, you can choose to offer any type of product or service during a donation-based crowdfunding campaign. Many companies choose creative offerings for larger donations, such as a meet-and-greet lunch with the company's founders or an acknowledgment on the company website.
Assuming that you choose to launch your campaign on a crowdfunding site such as GoFundMe, you can look forward to the platform facilitating most of the process, including managing donations. You'll be asked to set a goal for your campaign and will be asked whether you wish to refund the money of those who have donated if this goal is not met. Unless the donations are refunded, though, you will be expected to follow through on whatever it is that you promised in exchange for donations.
How does Equity Crowdfunding Work?
Equity crowdfunding is used less frequently than donation crowdfunding campaigns. To raise money using this type of fundraising campaign, you exchange a percentage or ownership in your company for capital.
The benefit of equity is that there is no debt or repayment required. However, you do sacrifice partial ownership in your business venture if you choose to raise funds with equity crowdfunding.
Benefits of Crowdfunding
Successful crowdfunding campaigns have several advantages for startup founders and small business owners alike, including:
Crowdfunding Is Simpler and Less Time-Consuming Than Traditional Fundraising
Compared to applying for a business loan or seeking out investors, creating a crowdfunding campaign is far less of a hassle. With crowdfunding, you can create your campaign and start receiving donations in a matter of minutes. While you will likely need to spend some time and resources marketing your campaign after its creation if it's going to be successful, marketing for a crowdfunding campaign also serves as an opportunity for business growth.
Crowdfunding Raises Brand Awareness
A successful crowdfunding campaign is something that has the potential to offer a lot more value than the money that it raises. Crowdfunding for startups presents companies with the opportunity to market their products and services at the same time that they are marketing their crowdfunding campaign.
There are plenty of cases where a viral crowdfunding campaign served to put a company on the map, bringing tons of valuable attention to their brand. While you might not be able to count on your campaign being the next viral sensation, you can rest assured that any efforts you make to market your campaign will double as efforts to raise brand awareness.
Recommended: Check out our list of the best crowdfunding sites for startups!
Crowdfunding Can Connect You With Potential Partners
Along with getting your brand in front of potential customers, the efforts you make to market your crowdfunding campaign can create connections with potential partners as well - whether its vendors who have a product or service that could help your company, potential investors, another company that you might want to collaborate with, or anything in-between.
Crowdfunding Allows You to Retain Your Equity
As we have already mentioned, most companies do not offer equity in exchange for crowdfunding donations, choosing instead to offer their products or some other creative incentive. This means that crowdfunding can enable you to secure funding for your company without having to give up any of the equity that you own.
Even if you compare crowdfunding to securing a bank loan instead of comparing it to seeking out investors, crowdfunding is still advantageous since you don't have to pay back the money that you collect. In most cases, crowdfunding boils down to simply giving customers the option to pre-order products, which is something that comes with far fewer drawbacks than selling equity to investors or taking out a loan.
Crowdfunding Can Serve as Market Research
Since creating a crowdfunding campaign is so simple and affordable, some companies choose to use crowdfunding as a form of market research, throwing out feelers to see what customers will respond to best. Since you are able to simply refund donations if a campaign is not successful, crowdfunding enables you to try out various ideas with little to no risk
How to Get Crowdfunding for Your Startup
The simplest way to create a crowdfunding campaign for your startup is to utilize a crowdfunding platform. While these platforms do charge a small percentage of the donations that you collect, the services that they provide are typically well worth the fees that they charge. From facilitating donations to providing tools for marketing your campaign, working with a crowdfunding platform offers a lot of advantages that you won't enjoy if you decide to do everything on your own.
As for which platform you choose, there are several great options to consider. GoFundMe, Kickstarter, and Indiegogo are three popular crowdfunding platforms, but there are plenty of others available to choose from as well. Just be sure to research each platform's fees and terms and conditions before you decide which platform is best for your needs.
Frequently Asked Questions
How much do crowdfunding platforms charge?
Crowdfunding fees are assessed on a per-donation basis and are typically a percentage of the donation along with a small, flat fee. While these fees will vary from platform to platform, Investopedia states that the average crowdfunding platform fee is 2.9% plus about $0.30 per transaction.
What happens if a crowdfunding campaign fails to reach its goal?
The answer to this question will ultimately depend on the terms and conditions of the specific crowdfunding platform that you choose to facilitate your campaign. In most cases, though, donations will be automatically refunded in the event that a campaign does not reach its goal. With that said, you may be given the option to inform those donating that their donations will be kept regardless of whether the campaign goal is met. Just keep in mind that keeping donations without delivering on your campaign's promises is something that is sure to generate a lot of negative press for your company.
What happens if I don't deliver on crowdfunding promises?
Once the campaign's goal has been met and the money has been delivered to its owner, most platforms consider their job complete and do not guarantee that the campaign will subsequently deliver on its promises. If you take money without delivering on whatever it was that you offered in return, though, your campaign will be marked as a scam, and you won't be able to create any future campaigns on that platform. You can also expect any goodwill or positive publicity that your campaign creates to go out the window.
Is crowdfunding a legitimate way to fund a startup?
Crowdfunding for startups is something that has gained plenty of legitimacy over the past couple of decades. Today, crowdfunding is a heavily utilized strategy among entrepreneurs and business owners, and you shouldn't worry at all about your company being viewed in a negative light if you choose to create a crowdfunding campaign.