What is Crowdfunding

Many people consider crowdfunding a product of the 21st century. And even though crowdfunding as we know it emerged in the beginning of the century, its roots can be tracked way back in history. For example, the symbolic Statue of Liberty in New York was actually funded by small donations from Americans and French men. Historical writings show that Mozart and Beethoven financed music compositions and concerts with money raised by interested patrons. A few centuries later, there are hundreds of online platforms that exist with the sole purpose of connecting inspired creators and promising businesses with eager investors around the globe.

When speaking about the definition of crowdfunding, it’s rather a common practice to compare it with fields like micro-finance and crowdsourcing. However, it is important to emphasize that despite the imminent parallel between these concepts, crowdfunding represents its own unique category of fundraising.

Crowdfunding has established itself as a viable financing mechanism for startups, aiming to launch a product or scale up their business. Its rising popularity has led to many definitions being proposed. One of the most accurate crowdfunding definitions belongs to Belleflamme, who describes crowdfunding as an open-call through the Internet for financial resources either in the form of donations or in exchange for tangible or financial rewards.

Unlike financial injections from venture capitalists and business angels, crowdfunding is characterized by a large number of investors. The “crowd” in a crowdfunding campaign may contain of hundreds and even thousands of individual backers. Crowdfunding projects can vary greatly in terms of goals and amount of money being raised – from small artistic projects to businesses seeking hundreds of thousands of pounds to lift an ambitious idea off the ground or take a concept to the next level.

While trying to formulate an extensive definition of crowdfunding, one cannot skip describing the leading agents in the funding process. Modern crowdfunding is typically executed by three main actors – the founder, the backers and the crowdfunding platform.

• The crowdfunding platforms serve as intermediaries between the people who are launching a project and the people who wish to support the given project;
• The founder (the creator) is the person initiating the fundraising round;
• The funders (backers/ investors) are the people that are willing to invest a certain amount in a given project with expectations (in most cases) for a product, return of the invested amount with interest, shares in a business.

Over the years, crowdfunding has evolved in different directions, resulting in four different types of crowdfunding – reward based, donation-based, lending-based and equity-based. We have already described in detail the characteristics of each crowdfunding type in another of our blog entries. To help you better understand the definition of crowdfunding, here we will summarise the defining features of each type.

In our previous article – Startup crowdfunding, we have described how to select the best type of crowdfunding depending of the lifecycle stage of your business. If you are yet to make this key decision, make sure to give it a read.

To make our articles as useful as possible, from now on, we will be finishing each new article with a few tips and insights from our experience working with different creators on various campaigns.

Crowdfunding success factors:

• Researchers have found that the size of the social network of the creators influences the success of the crowdfunding campaign. The bigger the network, the better the chances of success. Having at least a dozen backers soon as it goes live is a strong social poof and improved the chances of success significantly;
• Research on the topic also shows that the duration of the campaign influences the success as well – longer campaigns have lower chances of success, possibly because longer duration is associated with a lack of confidence;
• It’s important to set the crowdfunding goal as low as possible. Research shows that backers are drawn to campaigns with a high overfunded percentage – regardless of the size of the target. In literature, this is called the “green bar effect” – related to the backers’ bias towards funded campaigns;
• Detailed description of the use of funds and transparency during the whole process have been shown to influence the outcome of campaigns as well. Backers want to know what the creator plans to do with their money.

We can help. Drop The Crowdfunding Studio are proud partners of Crowdcube and Indiegogo. We assist ambitious businesses in communicating their ideas, products and services with outstanding crowdfunding video production, campaign design and crowdfunding marketing.

To learn more about us and our services, visit our website: drop.studio

Or book a free phone workshop today and ask us anything: how to create a successful crowdfunding campaign or how to accelerate your business from zero to fully funded.