A Brief Guide To Crowdfunding

August 15, 2019
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Ever since 1997, when the British rock band Marillion managed to finance their reunion thanks to online donations from fans, crowdfunding has been transforming the world and becoming a force to be reckoned with.

It is a phenomenon that has changed the way we support philanthropic causes, run businesses, start new initiatives, and even invest.

The purpose of this article is to discuss how and why crowdfunding came about and to provide some examples of how the model influenced some of the online investment platforms we see today as well as give you some tips on how to get started.

What is crowdfunding?

Crowdfunding is simply a process of funding a project by a “crowd” rather than one, or a few, investors.

In the case of crowdfunding, the funds come in small installments from many different sources compared to only having one or a few funding sources (like a bank or an individual investor).

By “crowd” we mean just about anyone willing to donate or invest - friends, family, neighbors, or even complete strangers. The project for which the funds are being raised can be anything - from a simple trip around the world to a serious business venture.

Modern crowdfunding has evolved and influenced various business spheres, including the investment industry.

Crowdfunding investing, or “crowdinvesting” is a relatively new concept, which incorporates the key principles of crowdfunding to give investors an alternative investment instrument. Crowdinvesting platforms are usually niche-specific and have much stricter requirements for both investors and fundraisers.

Examples of crowdinvesting platforms can be found in the worlds of commercial real estate, residential real estate, collectibles, antique cars, and more.

What is a crowdfunding campaign?

A crowdfunding campaign is a set of activities aimed at gathering the needed amount of money to fund a project.

Such campaigns are usually time-limited and can take place offline (for example a local charity raising money for a pet shelter) and online - via social media or on specialized crowdfunding platforms.

One of the top examples of successful crowdfunded projects is Veronica Mars TV show, which was brought back to life thanks to immense fan support and $5.7M raised on Kickstarter.

What are the types of crowdfunding campaigns?

Depending on the type of project they are running, fundraisers can choose among three main types of crowdfunding campaigns:

  • Donation-based: Such campaigns do not offer any financial reward for the investor and are most often run by charities and nonprofits.

  • Reward-based: In this case, investors provide donations in return for something, most often a product or service the campaign was raised for.

  • Equity-based: Investment in return for equity shares in the business, i.e. financial ROI.

How can crowdfunding help businesses?

Reward-based and equity-based crowdfunding can provide an excellent opportunity for small business owners to raise capital on early stages of their projects.

The crowdfunding approach most people are familiar with when it comes to raising funds for early-stage businesses is the rewards-based campaigns supported by companies like KickStarter. This typically involves "backers" that donate money to projects or businesses ("fundraisers") in exchange for a reward in the form of a product or service after the campaign is successfully funded.

Examples of successful crowdfunded companies using this approach include: VR headset provider Oculus ($2.4 Million raised), wireless headphones company Bragi ($3.4 Million raised), and board game companies like Exploding Kittens and Dwarven Forge ($17 Million raised in total), each of which were able to raise millions of dollars and kick-start their success thanks to reward-based crowdfunding.

There are also numerous platforms that specialize in equity-based campaigns, which can help you raise investment capital for an early stage company or an investment opportunity where you can connect with investors willing to purchase a stake in your company or asset and help with its implementation or have it managed as a passive investment.

Since the conception of equity crowdfunding in 2016 to 2019, these platforms have helped companies raise an aggregate of more than $330 million according to Crowdfund Capital Advisors.

Crowdfunding for small business is usually reward-based or equity-based, and while it does provide relatively quick and easy access to cash, it can also come with a great deal of responsibility for the business owner in many cases.

However, relying on crowdfunding to start a business or achieve a business goal also has many benefits: It can result in faster funding of your project, help you reach a larger audience, and give you an opportunity to receive valuable feedback about your project and build a community of supporters (and potential loyal customers).

How does crowdfunding work?

Crowdfunding in modern days happens almost exclusively on specialized online platforms that offer crowdfunding options and act as intermediaries between fundraisers and donors or investors.

The logic is simple: fundraisers join the platform with the aim to gather capital for their project, while potential investors or donors join it with an aim to find interesting (and potentially lucrative) crowdfunding opportunities.

Both parties meet and communicate on a platform, which also handles all the paperwork, bookkeeping and information sharing (as per crowdfunding rules introduced in the USA in May 2016, which impose certain crowdfunding limits for investors and make funding platforms responsible for regulations, compliance and fraud prevention).

Pros and cons of crowdfunding

Without a doubt, crowdfunding looks like an easy way to raise money for almost any project. However, it certainly has its pros and cons. Therefore, it is wise to consider both the benefits of crowdfunding and its disadvantages before starting your first campaign.

Advantages of crowdfunding:

  • Accessibility and wider reach: While it is still important to make people fall in love with your idea, crowdfunding platforms gives fundraisers a chance to present their projects to thousands of interested people at the same time, without having to stalk potential investors and perfect “elevator pitches” in hope of getting noticed.

  • Debt-free funding: Crowdfunding is an excellent opportunity for entrepreneurs to start a business without bank loans, credit history checks, or placing assets as collateral. While obligations to investors are still in place, the risk is much smaller. In terms of crowdfunding investments, this can also lower the amount of risk associated with an investment by allowing investors to become owners of properties with little or no debt, reducing the risk of default during economic difficult times.

  • Crowdfunding campaigns can be used as a powerful marketing and PR tool: Among the benefits of crowdfunding is the ability to quickly test the viability of a business idea and build a pool of first loyal customers, as well as get wide media coverage and a compelling PR story. If you are selling a property on the other hand, you could expand your reach beyond the typical sphere of influence you would receive on a typical real estate listing.

Disadvantages of crowdfunding:

  • Competition: It is important to understand that crowdfunding has become extremely popular and fundraisers around the world are going to great length to make their ideas stand out among thousands of others. While crowdfunding does offer numerous benefits compared to traditional ways of funding, it still requires thorough preparation and mastering the art of persuasion.

  • Risks of failure: Being left with a failed campaign could potentially put off potential investors in the future and can be the nightmare of any fundraiser. However, many companies are able to use this feedback to go back to the drawing board, adjust their offering, and try again with a product that better achieves product-market fit.

  • Costs: Surprisingly, prepare to spend quite a decent amount of money in order to raise capital via a crowdfunding campaign. Starting from producing a pitch video, taking the time to arrange and market your campaign, and ending with platform fees (up to 6-7% in some cases), crowdfunding is not as cheap as it may look. However, in many cases the benefits can still outweigh the costs.

How to start crowdfunding

Successful crowdfunding starts with an idea inspiring enough to unite people and urge them to support your project.

However, apart from the idea, you should have a clear view of how to make it a reality. Which materials will be used for producing your product? Where to get them? How to transport them? How many people should you employ? And, most importantly, how much money is needed to achieve all of it?

Once you have a clear view of the project and the funds you need to raise, you can start crowdfunding. Here is how to do it:

  1. Choose a crowdfunding platform depending on the peculiarities of your project, the type of campaign you want to run, and the size of donations you are expecting.

  2. Plan your project and fill out a campaign page. It includes writing an enticing title and preparing a pitch - a written or video presentation explaining what your project is about and why it is worth investing in it. Appeal and persuasiveness of the pitch often play a decisive role in the outcome of the campaign, so it is crucial that you tell a powerful and compelling story.

  3. Promote your campaign. Let as many people as possible know that you are raising money to attract the most investors. Here you can use paid advertising, email campaigns, personal outreach, social media, press releases, etc. Utilize every channel and every opportunity to spread information that can help you with crowdfunding.

  4. Start crowdfunding! Do not forget to update investors on the progress and share your plans for the future.

Which crowdfunding platform to use?

There are hundreds of rewards-based crowdfunding platforms out there, each of which has different rules, fees, audience, and preferred project types. List of the best and most popular in the USA include:

Kickstarter. Probably the most well-known crowdfunding platform which can be used to fund almost any project, except for non-profit. The peculiarity of Kickstarter is that there is a threshold that you should meet in order to keep the raised funds - in case the initially set financial goal is not reached, you get nothing.

Indiegogo. Perfect for all kinds of projects, including non-profit. In comparison to Kickstarter, there is no threshold, so it is possible to keep the raised funds even if the initial goal was not reached.

Patreon. A subscription-based crowdfunding platform aimed at supporting creative projects - musicians, writers, and other artists.

GoFundMe. The most popular platform for personal projects and charity (donation-based).

While crowdfunding may look like a simple activity, it is important to carefully check the platform and its rules before joining and starting a campaign. In fact, the details and proper execution of this process can be so involved that there are even numerous freelance specialists and agencies that offer professional crowdfunding services and can help you choose a suitable platform and launch a successful campaign from A to Z.

How to get crowdfunding donations?

An average donation on rewards-based crowdfunding platforms amounts to $88 according to recent statistics. It is clear that in order to successfully fund an entire project, an entrepreneur must encourage a significantly higher number of donations. Here are some crowdfunding tips which will help you get more crowdfunding donations:

  • Study your competition: When planning a fundraising or crowdfunding campaign, check how similar projects were structured and concentrate on what they did RIGHT.

  • Provide incentives: Even if you are running a donation-based crowdfunding campaign, make sure the donors know that their contribution will be rewarded. It may be anything, from an early glimpse into your product to a mention of their name in a TV interview.

  • Be the most active in the first 3 days: According to the statistics, almost half of all the funds are raised in the first and last 3 days of the campaign. High amounts of donations in the first couple of days signify that the project has a lot of public support right from the start, which encourages more and more people to follow the example and also donate. Thus, take advantage of social media, email and other resources to tell the world about your campaign.

How to invest with crowdfunding?

Apart from being a convenient way to raise capital for entrepreneurs, crowdfunding also provides an opportunity for investors to not simply be donors, but also invest in startups or other investment opportunities in exchange for equity in the company or business venture in hopes for a return on their investment.

This is a unique chance for crowdfunding investors to discover innovative companies and new forms of alternative investments with potential to change the world and support them in the early stages of their development.

To invest in crowdfunding, one should utilize specialized equity crowdfunding platforms, such as Wefunder, Crowdfunder, or SeedInvest. Such platforms are usually highly selective with the investment opportunities they allow on their platform and do much more than merely connect investors and fundraisers.

With 90% of all startups failing, investment crowdfunding definitely carries its fair share of risks and dangers when investing in startups specifically. However, this is why investment platforms allowing you to diversify your portfolio with alternative assets with historically more stable returns have become increasingly popular to both hedge against other crowdfunding investments or other assets in your investment portfolio.

The above content is not intended to be a comparison between products, but is intended for general, educational and informational purposes only. Any performance noted is historical and there is no guarantee any trends will continue. All investing involves risks, including the complete loss of principal. Diversification does not guarantee a profit or protect against loss in a declining market. It is important for each investor to review their investment objectives, risk tolerance, tax liability and liquidity needs before investing. Investment vehicles have differences in fee structure, risk factors and objectives. Investments are considered speculative, involve a high degree of risk and therefore are not suitable for all investors.

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