How Does Crowdfunding Work? An Introduction
Crowdfunding, in the simplest terms, is the act of seeking financial support to back your project or business idea from a large number of people. It goes beyond the traditional financial resources provided by banks, business angels or venture capital firms. Crowdfunding is considered an open call through the internet for the provision of capital goods. The prime purpose of crowdfunding is that it enables individuals to bring their innovative creations to life, and build a customer base.
Different types of crowdfunding have been proposed, all depending on what investors receive in exchange on their contribution, such as equity shares (equity-based), a product, service or other non-monetary rewards that are more or less symbolic (reward- and donation-based) or a particular interest rate (lending-based).
Here is a brief insight into what each campaign type means:
Rewards-based Campaign: This promises investors that they will be rewarded (usually with a non-monetary reward) for contributing to the organisation’s campaign.
Equity-based Campaign: This type of campaign offers investors equity (a share) of the business to the investor, encouraging individuals to invest knowing they will benefit from it.
Donation-Based Campaigns: Donation campaigns assist charity projects to find their funding, offering no rewards apart from the satisfaction of donating to a worthy cause.
Lending-Based Campaigns: When a large group of investors collectively decide to make a mall contribution to an individual or business looking to raise funds, and in return, the loan is paid back with interest over time.
For Rewards-based campaigns:
A funding platform for creative projects, Kickstarter is one of the world’s largest crowdfunding sites which helped build successful companies such as Braggi and Pebbles. It has a surprising amount of $4,047,710,022 pledged to Kickstarter projects and 155,551 successfully funded projects. Here is an example of a successful Kickstarter campaign: Dame
Indiegogo is an international crowdfunding platform, allowing people to fund their idea, charity or start-up business. They have raised $1 billion across all projects, from dance to design. Example: Pulp
For Equity-based campaigns:
The UK’s leading equity-based crowdfunding platform, Crowdcube has been the most sought for equity funding site which has generated over 120,000 investments made, totalling to £130 million of investments made through the platform. Example: Sunstone
Seedrs is an equity crowdfunding platform used all around Europe, known for investing in start-ups or later-stage businesses. It gathered £125M invested in campaigns and 168 deals funded across 8 countries and 17 different sectors. Example: Zoomdoc
For Donation-based campaigns:
A for-profit crowdfunding platform, Gofundme has raised over $5 billion for people in need, securing their #1 position as the top fundraising platform online. It allows people to raise money for inspiring campaigns by incredible people. Example: LovearmyforSomalia
It is a global online social platform, recognised for being the world’s leading platform for charity giving. Example: Jambus
For Lending-based campaigns:
It is a peer-to-peer lending marketplace allowing investors to lend money directly to small and medium-sized businesses. A tailored solution to businesses who prefer to get funds processed quicker and are confident they will have enough revenue to cover the debt.
An online peer-to-peer lending site, LendingCrowd is a crowdlending firm that enables investors to support small and medium-sized businesses by lending personal capital through small loans, while receiving a monthly interest payment.
The crowdfunding process is as followed:
- A creator proposes an idea or solution, and then launches it on a crowdfunding platform, asking for the target amount.
- Funds are provided by backers highly invested in your business and what you got to offer
- The crowdfunding platform is used as a mediator which brings together two parties and gets them to exchange ideas, contents and funds. The platforms tend to use web-based payment systems to facilitate the trade of resources between the creator and investor. It also uses social media and video sharing platforms to raise awareness.
This A-Z guide aims to answer a common question we often get asked… how does crowdfunding work?
In the guide below we will be teaching you about some of the key aspects that concerns crowdfunding. Things that we will be covering in the guide are things such as how a business can successfully run a campaign.
We will also cover such topics as how crowdfunding campaigns can become successful with the use of features such as social media or even with help from a crowdfunding studio such as us here at drop studio and will help you finally learn the many answers to ‘How does crowdfunding work?’.
How Does Crowdfunding Work? A-D
The best way to ensure that your crowdfunding campaign is successful is learning how to attract potential backers. Aim to persuade individuals to invest in your project by not only luring them in with a great product/service but also with a pitch, or a video, explaining the benefits of your product/service to them.
Crowdfunding offers a number of benefits for entrepreneurs. It enables them to obtain some sort of capital investment in order to help a new business venture. It can even help existing businesses bring out a new product or service that they have been developing.
A big part of knowing the answer to ‘how does crowdfunding work?’ is learning about campaigns.
The campaign is the most important part when it comes to crowdfunding. You’ll even see that campaigns are present on the crowdfunding platform that you have used for your project. Look at examples, and learn why it is of utmost importance that you have clear and concise information on the product or service that you are funding for.
It is very important to set deadlines. When setting deadlines for pre-raising and crowdfunding you should make sure that they are realistic and achievable for the amount that you wish to raise. For example, if you are raising under £100,000 for your project then the 30-day deadline that is recommended by the platforms should be ideal.
How Does Crowdfunding Work? E-H
There are a number of different ways that you can crowdfund. One way is to run your campaign as an equity campaign. This means that backers are investing in your business, in return for a collective share of your business.
When it comes to crowdfunding on platforms, you should make sure that you know how much each platform charges after your project has been completed. For example; a well-known crowdfunding platform, Crowdcube, charges 7% if your project is successful.
Always consider that in crowdfunding you will need to set a monetary goal that you would like to reach. This could range anywhere from £1 to £1,000,000. The money should be enough to help develop your business to the next stage, or to help release a product that your company is working on.
Sometimes a crowdfunding project can become increasingly popular during its run, and the demand for the product or service may become high. If this happens they may find that they may not have enough of the product to distribute to their backers.
In order for a crowdfunding campaign to prepare for this, they should make sure that they have a surplus of their product available before the start of the campaign.
How Does Crowdfunding Work? I-L
Investors are key when it comes to crowdfunding as they determine whether or not your project is successful. Always ensure that they are drawn in by your product as it’s essential to your crowdfunding campaigns success.
Charity based crowdfunding campaigns have some exclusive platforms that are known for their great service, an example is JustGiving. This platform benefits charity projects and enables all types of fundraising. It helps fundraisers bring their projects to life and helps them maximise the donations that they can receive. They do, however, charge a small transaction fee on each donation.
Kickstarter is a crowdfunding platform for creative projects. They work with everything from films, games and music etc. Their system is an all-or-nothing funding scheme, meaning that if you do not reach the goal that you set for yourself then all the money that has been invested is returned to the backers. The reason for this is that it helps motivate project managers, and provides less risk for everyone involved.
In the running of a campaign, such as rewards-based campaigns, businesses have to make sure that they consider logistics. This is due to the fact they have to be prepared to send their products to their customers. The best way to prepare for this would be to ensure that you have the required funding before the campaign launch or to use part of the money you raised to help with this.
How Does Crowdfunding Work? M-O
Marketing is an important aspect when it comes to crowdfunding. This is because marketing helps you get your product across to potential investors by drawing them in through videos or social media. It can help you reach the goal of your crowdfunding campaign by getting it in front of potential investors. Marketing helps give campaigns the push they need to gain backers for their product or service and gain the capital for their project.
Networking is when you form relationships with individuals in order to create or act upon business opportunities. It can be key when it comes to setting up a crowdfunding project, as many platforms expect businesses to have raised a certain percentage of the money that they would like to raise from investors beforehand and this can be family members or friends.
It is also important to network with potential backers, in order to help them understand the benefits of your product and how it can enhance their lives.
Some crowdfunding projects can experience overfunding, this occurs when a crowdfunding project proves to be very popular. For example, this happened to a business known as Core Collective. Initially, they were looking at raising just over £1,000,000 but they proved to be very popular and raised over £2,000,000.
If overfunding happens to an equity project, the platforms usually expect a business to give a greater share of their business than they first wanted to. To prepare for this a campaign manager should always ensure that it is possible for them to give away more of their business to their backers.
How Does Crowdfunding Work? P-S
Choosing the right platform for crowdfunding is one of the most important things to consider when deciding to create your own campaign. When looking at the platforms you should look at how many of their projects have been successful, and how much they charge you afterwards. There are a variety of platforms available depending on the type of project you are going for.
The time can go by as quick as a flash when your crowdfunding. During a campaign, businesses should make sure that they are prepared for all possible outcomes. For example, if they overfund they should ensure that they have equity that they can offer to the backers, or be prepared if their product goes into high demand.
One type of crowdfunding is rewards based. Instead of offering a potential backer a share of your business, you instead offer them a reward such as an early release of a product you are developing. The more money they invest, the better the rewards they would receive.
Having a social media presence is key when it comes to running a crowdfunding campaign. It helps keep your backers up to date with any new developments in your business and allows you to raise awareness for your business in order to gain potential investors.
How Does Crowdfunding Work? T-W
When running a crowdfunding campaign timing is of the utmost importance. Most platforms only let campaigns run for a maximum of 90 days, and if you do not meet the goal of your crowdfunding campaign sometimes all the money already invested goes back to the investors. The best way to reach your target is with good marketing and a great idea.
Crowdfunding has proven to be very unpredictable in recent times. This type of funding is very hit and miss with projects, as some projects can reach their targets in a short amount of time or even in some cases overfund. Someone with a similar idea may also crowdfund around the same time, but may fall short of their goals or not even raise any capital.
Videos are one of the single most important aspects when it comes to crowdfunding. A high-quality crowdfunding video goes a long way when it comes to finding investors, as it makes it a more interactive way to get the idea behind your product to the customer instead of them having to read through a long list. The ideal time for a crowdfunding video is 3 minutes and under.
Having a website can really aid your campaign. The reason for this is that it helps provide your investors with more detailed information about the product and how it can help benefit people’s lives. When it comes to a website it should be well-built, clear and have easy user navigation to make it easier for them to find the information they require to make an informed decision.
How Does Crowdfunding Work? X-Z
When considering to crowdfund you should make sure that your product has a certain appeal to it. Does it provide something that sets it apart from similar products? Does it have a noteworthy feature or quality that will make potential investors be drawn to it from the first few seconds or from reading up about it?
One way to hit your crowdfunding goal is if you offer certain benefits that no similar project is offering to their backers. You could even consider showcasing a key feature that is in your product and is missing from a competitor.
YouTube also provides a number of benefits for crowdfunding. The way it does this is that it allows you to post advertisements in order to bring awareness to your product, or the fact that your business is crowdfunding. You can also create a YouTube channel for your business, with regular video updates on your products, or even with a few videos on how your product works to help give your customers a more in-depth point of view.
Zenith is the time at which something is most powerful or successful. For crowdfunding, this would be the point in which your company has fully funded, or in some cases it has overfunded, giving you a higher amount of money which you can use to help develop your business as a whole. When crowdfunding you should consider ways in which you can reach this point of zenith.
How Does Crowdfunding Work? Conclusion
This A-Z guide around the question ‘how does crowdfunding work?’ shows off the key parts to consider when wanting to crowdfund. Crowdfunding has become a crucial way for businesses to raise capital in order to help develop themselves without having to pay money back as they would have to using a traditional method such as a loan from a bank.
This guide makes it easier to understand the what to do and what not to do when it comes to crowdfunding and gives you the best chance to help you run a successful crowdfunding campaign.
Hopefully, you’ll have all the answers you need now when thinking about the question ‘how does crowdfunding work?’.
How Drop can turn your idea into a success story
- Immediate feedback on whether your business is suitable for crowdfunding
- Access to Drop Studio’s Crowdfunding Accelerator Service – available for Crowdcubeapproved campaigns only
- Crowdfunding strategy and planning
- Marketing strategy and marketing content – social media posts, ads, emails
- Management of social media profiles, ads and email marketing
- Crowdfunding video production – treatment, script writing, filming, editing with animation, promotional content
- Ongoing crowdfunding support throughout the whole campaign