Crowdfunding – Fundraising Explained from A to Z

In the past, when someone wanted to fund something, whether it was a project, a company, or anything that required capital to start, there were a few ways to raise money. They could take on debt from a loan or also raise money from friends, family members, or VC investors.

They could even take the bootstrapping route and scrounge up as much money as possible to fund the project themselves. But thanks to crowdfunding, now they can raise capital using the help of others. How? Keep reading our A to Z guide of Crowdfunding and find out!

What is Crowdfunding?

Crowdfunding is a way to raise money from a large number of people who pool together small individual investments to provide the capital needed to get a company or project off the ground. Individuals, charities, or companies can create a campaign for specific causes, and anyone can contribute.

In most crowdfunding campaigns, you will see a goal amount: how much money you want to raise, how much money has been raised so far, how many people backed the crowdfunding campaign, and how much time is left for the campaign.

Types of Crowdfunding

The following four types of crowdfunding are categorized by what the backers get in return for their money:

Donation

People who back these kinds of campaigns are more donors than backers. They do it for the cause, raise money for a sick person, or save animals. This is crowdfunding for nonprofits. Most donation-based campaigns are flexible campaigns. You’ll find such campaigns on platforms like GoFundMe and Indiegogo which also offer the flexible model.

Lending

This type of crowdfunding allows individuals to obtain loans directly from other individuals without a bank or other financial institution acting as a middleman. Think of this as debt crowdfunding.

Reward

In this type of Crowdfunding, backers will get a reward in return for their money. It could be a book with a personal dedication in a crowdfunding campaign to publish a book or tickets to the premiere in a crowdfunding campaign for movie production. Kickstarter, Patreon, and Indiegogo are well-known reward-based crowdfunding platforms.

Equity

This type of crowdfunding enables businesses to raise money from the public in return for equity in the company. The backers get shares. In the past, if a company wanted to raise capital from the public, it had to issue a prospectus (expansive) and go public – but, there are some exemptions for this though. Only established companies could have done that. However, in recent years many countries passed special laws that enable companies to do so through crowdfunding platforms like Republic, SeedInvest, Crowdcube, and Wefunder.

Examples of Successful Crowdfunding Sites

To help you better, we researched and reviewed the top crowdfunding platforms based on their ease of use, history of generating fundraising success for their customers, pricing options, social media integrations, and more. Let’s take a look at each site below.

Kickstarter

Kickstarter is a rewards-based donation platform that has been helping companies raise money since 2009. It has raised 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. That’s all!

GoFundMe

GoFundMe was launched in 2010 and has become one of the largest fundraising platforms online, having raised more than $9 billion from over 120 million donations. Its success and simplicity help make it the best platform for individuals.  You can set up a GoFundMe page in three simple steps.

First, create your campaign by detailing the amount of money you want to raise. Next, tell your story, which can include photos and videos. The final step requires you to share your campaign with your friends and family via social media, text messages, and email. 

LendingClub

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 be 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

Indiegogo, Inc., was founded in 2008 by Danae Ringelmann, Eric Schell, and Slava Rubin. With Indiegogo, you can create a crowdfunding campaign for any idea or product that you want to launch. To get started collecting funding using the site, you can set up a campaign for up to 60 days, the fee for which is a 5% platform fee plus a 3% to 5% third-party processing fee.

Their tools allow you to integrate with other platforms, including Meta and Google, to promote your campaign. Once you are done raising money, you’ll receive it via your bank within 15 business days. You can also invest in one of the many thousands of ideas and products and become a backer.  Indiegogo is an accredited business with a BBB with an A+ rating.

Crowdfunding Rules

Most crowdfunding sites have specific rules. For example, Kickstarter doesn’t allow equity crowdfunding and has a list of prohibited items that you cannot 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 should adequately research different crowdfunding sites, so you can understand which platform works best for your business. You should also check federal security laws before opting for crowdfunding just to be safe. 

The Challenges of Crowdfunding

From all the benefits crowdfunding provides, it is very easy to assume that it is an easy or free way of making money, but what we tend to forget is that 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.

Kendrick Nguyen, CEO, and co-founder of crowdfunding platform Republic has listed five key challenges that plague reward-based crowdfunding campaigns:

1. Finding and implementing a cost-effective marketing strategy before, during, and after the campaign
2. Crafting the right messaging in the campaign description that will drive interest in the product or service
3. Developing an informative and exciting campaign video that explains the product and its benefits
4. Creating and planning the rewards program to strategically maximize the ROI 
5. Finding the most effective and cost-efficient fulfillment method for the rewards

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.

Building a Successful Crowdfunding Campaign

To be able to make big decisions, one should start with preparatory ones which are stated below.

All or Nothing Campaign

If there is a certain amount of money you have to raise to fulfill the purpose of the campaign, then you should go for an all-or-nothing campaign. However, if it’s a crowdfunding campaign for a non-profit which can use any amount it raises for the purpose, then the flexible campaign can work as well. 

How Much Money are You Looking to Raise

Most people set a higher goal amount than they should. You should aim to set the minimum goal amount that will enable you to fulfill your core purpose which includes all purposes. A crowdfunding campaign psychology is like this: People feel much more comfortable backing a campaign that already has backers. They don’t like to be the first. Many crowdfunders are concerned that if they’ll set a lower goal amount, people will stop backing them once they meet it. 

Duration of The Campaign

Campaigns should have a sense of urgency, a threat of a lost opportunity if the support button isn’t pressed now. Indiegogo published some data that showed the ideal campaign duration is 30 days. Some crowdfunders say it’s even less than that. Running a crowdfunding campaign requires a lot of time and effort. You can’t do it properly for 60 days and you probably can’t meet your potential within 10 days. 

Crowdfunding Video

It’s proven that good video content increases your chances to raise money because a good video delivers the message of your campaign in a faster way, and it fits people’s short attention span. It also makes you look more focused, both to potential backers and crowdfunding platforms who vet your project. 

For most Crowdfunders, this is the biggest hassle in the campaign building phase. So, if you have a budget, you should consider hiring a professional to help you with it to make sure that your video stands out. However, a lot of campaigns tend to raise a hefty amount of money with their unprofessional video. It happens because what matters is the message that is being delivered, not the quality of the video. 

How to Prepare a Video Script

Preparing a video script can be a bit of a tricky deal, but it’s doable. If you’re confused about constructing a creative script, you can watch videos on YouTube. There are several videos that provide detailed tutorials on how to create attractive video content for your crowdfunding campaigns. 

How Long Should a Video Be?

Your video should be up to 3 minutes in length, but you have 5-10 seconds to catch people’s attention. Show yourself and your team in the video, people want to see who the money goes to. Also, show your product. You have to make sure that your video contains as much meat as it can in as little time as possible. 

Crowdfunding Text 

The text of your crowdfunding campaign is what people see below the video. Since the video is only 3 minutes long and serves as the trailer of your campaign, the text and graphics you include in your campaign tell the whole story. 

The text should tell your full story and should be fun and interesting to read. It doesn’t matter if it’s a donation, reward, or equity-based crowdfunding campaign. Get people into your story.  It’s about your vision, what made you start your initiative, who are the people behind it, what success have you experienced with your initiative so far, what difficulties, and how you overcame them. 

When you write about the money you raise, tell people what it will be used for, show them you have done your homework and that you are very careful about asking for money you don’t really need. Tell them about the risks, and answer frequently asked questions. Add images of your team and graphics to support your story and to make people feel like choosing a reward just because it looks great. 

Crowdfunding Rewards 

There are two main reasons for people to support your crowdfunding campaign. They either get something out of it, which is more relevant to reward and equity-based campaigns. Or they’re doing something to do good and feel good. While in reward and equity crowdfunding campaigns people want to see what they get in return for their money, in donation-based campaigns, backers want to see what their money buys for those in need.

If it’s a classic rewards campaign, you can offer products, services, experiences, and also offer deals with third parties. You can limit the availability of a reward to incentivize people to back your campaign early. You can also limit the availability of a special price. The early adopters are more important than the money you lose when you offer a special price. 

You can also offer packages as you increase the price. If a specific price isn’t included in any package, mention it so people will feel it’s special.

The Benefits of Crowdfunding for Investors

Investors can gain a lot of benefits by putting their money into crowdfunding campaigns. 

• Most investors appreciate a low-risk venture, and crowdfunding offers just that. Since it’s not part of the financial market, investors don’t have to worry about the effects of the economy or stock market impacting their investment.
  
• It’s easy to invest in a crowdfunding campaign. Investors can put money into a project or company through a direct online process.
  
• Equity crowdfunding allows investors to fund multiple campaigns, which helps them to expand their financial opportunities and diversify their portfolios.

Tips for Crowdfunding Success

There’s no universal approach to crowdfunding, but there are three key places to start on your road to crowdfunding success.

Communicate with Backers

The importance of being transparent with backers throughout the process, even after the campaign ends is always stressed. You have to expect things to go wrong and react with honesty and transparency. You should have good communication with your backers, even when things go wrong.

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.

Share Relevant and Engaging Marketing Materials

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.

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 tends to be the best ways of gaining recognition. 

Prepare for The 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.

Examples of Successful Crowdfunding Campaigns

We have compiled some examples of successful crowdfunding campaigns as references. Let’s check them out.

Potato Salad

When Zach Brown wanted to try his hands at crowdfunding, he started with a simple, yet ambitious goal which is to raise $3,000 for the purpose of “renting out a party hall and inviting the whole internet to the potato salad party.”

This captured the internet’s attention and over 7,000 people came forward to contribute to the campaign. In the end, the potato salad party raised $55,492. It proved the power of crowdfunding.

Pebble Smartwatch

Pebble smartwatch also reached tremendous success when looking for backing from the crowd. The goal was to raise enough capital funds to launch its Pebble 2 and Time 2 watches.

Driven by customer fans-turned-funders, Pebble raised over $1 Million in just one hour on Kickstarter since it’s continuing to raise funds and is ranked as one of the top-earning campaigns in Kickstarter history. 

Sapient

Sapient was looking to raise a late seed-stage round. By launching a campaign on Republic, Sapient not only raised $1,070,000 from 1,889 investors but also gained 20+ customer leads and $750,000+ in customer contracts. They even attracted the attention of angel investors like Jason Calacanis.

Pros of Crowdfunding

There are many pros of raising capital through crowdfunding. The internet allows us to set up a crowdfunding campaign whenever, or wherever we might be. Following are the pros of crowdfunding:

Convenience is Convenience

The internet allows us to set up a crowdfunding campaign whenever, or wherever we might be. Also, the platforms provide immediate access to a fast-growing community eager to back new ventures.

This takes away a lot of the legwork typically associated with finding backers. Now we’re not saying it’s easy, just a little more convenient.

Great Alternative to Banks

Crowdfunding offers a great alternative to the conventional route through bank lending. It’s no secret that securing bank credit can be difficult for SMBs and Startups. They pose a risk many traditional banks are often unwilling to take. Even if you do secure a loan, it’s unlikely to be done in favorable circumstances.

Unlike banks, crowdfunding campaigns provide access to various forms of donation, as well as interest-free loans, and other forms of funding.

Choice of Platforms

With their increasing popularity and online accessibility, more and more people are signing up for crowdfunding platforms. As with most things in life, the more demand there is the higher supply. 

This has led to several crowdfunding platforms branching out and specializing in certain niches. This means entrepreneurs can choose from a wide range of platforms, with different specializations, fees, incentives, and communities. 

Cons of Crowdfunding

After we know the pros of crowdfunding, we should also be aware of the cons so we know what to prepare when we are building a crowdfunding campaign.

Inflexible

One downside to crowdfunding is the inability to make alterations to a campaign once it’s launched. This means the description, Ts & Cs, and allotted completion time cannot be changed.

If entrepreneurs are forced to make changes to the campaign, they could find the project null and void and be required to give investors a refund. Make sure to be 100% clear on all aspects of the project before launching.

Takes Significant Time and Preparation

Many entrepreneurs fail to appreciate the time, effort, and planning a successful crowdfunding campaign requires. Regular communication with investors, detailed financial reports, forecasts, POA (the plan of action) for the invested funds, etc.

This is all SOP (standard operating procedure) and a plan needs to be put in place (and documented) before a campaign launch. If not, entrepreneurs risk alienating their community and coming across as unprofessional and ill-prepared.

Administration and Accounting

This is more of a warning than a negative, but entrepreneurs need to consider the administrative and accounting challenges they’ll face.

While a lot of the legwork is taken upon the platform, it’s still up to the campaign creator to ensure accurate tracking of rewards, investors, contributions, the number of shareholders, etc.

Not only that, but an updated book need to be kept to ensure each investor receives their fair share of profits once equity is released. Regular communication with investors will also be required (typically from the CEO) so an efficient system needs to be put in place.

Concluding a Campaign

Once your crowdfunding campaign comes to conclusion, one of three things happens:

1. If the campaign didn’t reach its target amount, funds are returned to the backers. Some crowdfunding websites still allow you to collect all the money you raised if you fail to reach your goal, though often at an additional expense.
2. If the campaign was successful, you receive the total amount of money you raised, minus processing fees.We’re talking about the payments that are only required for successful crowdfunding projects and will not be charged to any that don’t reach their goal amount.
3. Equity crowdfunding campaigns differ in how they conclude, as you still have an obligation to the backers. That obligation depends on how the donations play out. 

Conclusion

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. We hope that this article was able to clarify everyone’s confusion about what Crowdfunding is and how it works.