Have you ever had an idea that you thought could be the next big thing? You probably have, but there’s a chance, you never ended up acting on it. If it’s because you didn’t want to risk the money, but getting investors seemed like a complicated process, crowdfunding might be just the thing for you.
What is crowdfunding?
Crowdfunding is when a project is funded by a big number of people contributing small amounts of money instead of getting one or a few big investors involved with big sums. These projects are usually organized on dedicated crowdfunding platforms, and often spread with the help of social media.
This is a nice definition, but what does it mean exactly?
How does crowdfunding work?
Crowdfunding works by collecting projects that need a specific amount of funding on online crowdfunding platforms where interested investors can come to browse and pick the ones they like. Investors can then show their support by sending a small amount of money for the project. It can be simply an altruistic act, expecting nothing in return, but even more often these backers get involved with the project to receive something for their money.
It means that if you have an idea for a product or project you want to bring to life, you can upload it to a crowdfunding website, where people can give you money to support your goal. Sounds good right? It does, and it is, but like everywhere in life, you will need to work very hard, and in the end you need to make and deliver the product or do whatever you organized the campaign for. But of course, that was the reason you wanted to start the whole thing, right? So, let’s see how to get to that point.
First of all, there are several funding methods that you can choose from:
- Reward-based: Investors receive something in exchange for their donation, usually the product itself
- Equity-based: in equity based crowdfunding people purchase the shares of an early-stage company, that is not out on the stock market yet
- Donation-based: donation-based projects exist with the sole reason of supporting someone or something financially. It can mean helping someone in need, in the case of an emergency, or supporting a good cause, like helping out a local school, but also a way to show support for one’s favorite artist.
Wait, who are these investors we keep talking about?
How to start a crowdfunding project
If you have a good idea for a project that you need funding for, you can start your own crowdfunding campaign. Doing this requires as much preparation and time as any other funding method.
First, you must have your idea ready and prepare a plan on how to bring it to life. When this is done, it is time to register to a crowdfunding platform and get to writing.
Describe the project in as much detail as possible, including introducing your product or goal and a specific plan for what you will spend the money on and what your backers might get for supporting you. When you’re finished uploading your idea, it will go live, and people can start supporting it. For this, you can give several options for your investors to choose from.
Even on reward-based platforms, people will have the option to support your project by a donation. In this case, they can pitch in with an amount as small as $10, which will show their support and help the project come to life – without getting anything in return.
Those that find your project interesting will probably be interested in not only supporting you but also in purchasing the product, when it is finally made. For this, you can set several options as well. This can mean a discounted pre-order price or bundles of accessories, but you can also offer additional benefits, like limited-edition items, or a personal thank you letter.
How do I know which crowdfunding platform to choose?
There are countless crowdfunding platforms on the internet, all functioning with the same idea behind them, but they can differ slightly in the projects they focus on or the way donations can be made. So, to find the perfect one for your project, you will need to do a little research.
The most popular crowdfunding platforms include Kickstarter, GoFundMe and Indiegogo.
- Kickstarter: a site very often used by startups and aspiring entrepreneurs. On Kickstarter, you must set a funding goal for your project, and you will receive the amount when the goal is reached.
- Indiegogo: a little more flexible funding system than Kickstarter. You can choose between a fixed goal, where you receive the donations as the funding goal is met, or a flexible goal, where you receive donations as they come in.
- GoFundMe: primarily focused on donation-based projects. People often start GoFundMe for unexpected emergency expenses or nonprofit projects.
These platforms are a good starting point, and they are popular for a reason, but if you are thinking about crowdfunding your own project, it is definitely worth looking into other platforms as well. There are a lot of platforms, and all of them work slightly differently, with slightly different projects in mind. You may have heard of Pateron, for example, which is often used by artists not only to ask for support, but to connect with their fans as well.
As you can see there are a lot of ways crowdfunding can be used, so it only makes sense that there would be a lot of platforms to cater to them all. So, do your research, and depending on what your project, your goal, and motivation are, you will surely find the most fitting one.
How do these crowdfunding platforms make money, you ask? What’s in it for them?
Crowdfunding platforms make money by taking a percentage, usually between 5%-12% of the money raised. They often operate with credit card fees as well, usually around 3%. This is something you should take into consideration when planning your budget, because with a large amount, it can mean quite a significant cut to your money.
Who can invest in a crowdfunding project?
It can be anyone. Literally. It can be your mom, your neighbor, someone from the other side of the world, a billionaire or a college student. Anyone. Which is what the beauty of crowdfunding lies in. Because if you want to keep up with new projects, show off the newest, coolest gadgets, or simply support someone for their genius idea, the only thing you have to do is to go to a crowdfunding platform and start browsing.
Why is crowdfunding good for investors?
Of course, crowdfunding is nothing without its interested investors. But what are the reasons so many people go for investing in a project?
- With crowdfunding, anyone can be an investor and show their support with a small amount of money
- Investors get early access to different innovative products and ideas
- Investors get to be a part of the creative process itself and provide feedback to make the product better
Why is crowdfunding good for a business?
If you’re a startup, crowdfunding can give you an excellent opportunity to launch your first product or experiment in a new territory. Here are the best reasons why you should go for it:
- There is no financial risk when planning the project, as you don’t need to invest your own capital
- If the campaign is successful, it does not only mean money for the project, but also helps with building the brand, especially if your campaign goes viral, or receives some media attention
- Venture capitalists and angel groups are highly regulated and the process of applying for funding can be a long and complicated process, while crowdfunding provides an easier alternative
- You get to keep all your equity, while other types of investments usually mean selling shares of the company to investors
The cons of crowdfunding
There are also some downsides to crowdfunding, which you should take into consideration when thinking about funding your project or deciding to invest in one:
- Since crowdfunding focuses on a big number of people and small amounts, it won’t help you get big investors that might be able to offer financial help or further funding if you ever need it – you will need to start a whole new crowdfunding project.
- Applying to several platforms is a lot of work and maintaining a desirable site for your project can be very time-consuming. You also need to update your backers and reply to messages to show that you are doing everything to achieve the goals you’ve set.
- Beware of scammers! There is always the risk of a project being a scam, or even if it isn’t, the project might fail, and you never receive the product you paid for.
Conclusion
All in all, crowdfunding is a great way for a startup to launch their product, or work on a project they might not have enough money for yet. The key is a very good plan, because, like regular investors, crowdfunding investors want to see a return on their investment, either by getting the product itself or even just the satisfaction that they were a part of something great, which wouldn’t have been possible without their help.
So, if crowdfunding sounds like something you might be interested in, we recommend checking out a few platforms, just to get a taste of how they work and once you’re familiar with them, it is time for you to put your hands on a cool gadget, support a good cause, or start your own project!
Good luck and have fun!
