Crowdfunding: The Basics and Definition Explained

Crowdfunding is an alternative way to garner funds or financial support for your business or project. Crowdfunding is often associated with emergency fundraising or fundraising for individuals, but it certainly has some advantages from a business perspective. This is particularly true in the early phase of your business development; whether you’re launching a new business, product or campaign – the opportunities are endless!

Contrary to traditional business models, crowdfunding is a more accessible approach for business owners and investors to raise money for new businesses, projects or initiatives. 

Today, we’ll be discussing the ins and out of crowdfunding, how it can work for you, and the available types you can employ. 

Here’s what we’ll cover.

What is Crowdfunding, and How Does it Work?

crowdfunding

Crowdfunding is a way of raising capital through the collective efforts of personal contacts, investors and individual donors. Crowdfunding utilizes the masses to help raise funds primarily online and through social media to maximize their exposure and investment potential. These campaigns lowers the threshold for investing, so even small amounts of money can be donated to your cause.

These types of investment platforms undermine the traditional methods of many business investment strategies. Traditionally, if you were looking to raise funds for a business or project, your capital options would be limited to a small pool of wealthy investors and organizations. 

Think banks, angel investors, venture capital firms, and similar institutions. 

However with crowdfunding, the threshold for investors is much lower, opening up your opportunity to a whole new market of investors, including personal contacts like friends and family. This significantly impacts your ability to reach thousands of potential investors without duplicating your work.

The success of this investment platform is its ability to turn the traditional fundraising or investing funnel upside down. Rather than pitching your business or project far and wide to a narrow scope of investor opportunities, crowdfunding allows entrepreneurs the ability to showcase their business or initiative in a single platform with a farther reach to lower threshold investors. 

The investor funnels channels into your business outward, saving you time and resources. With the streamlined approach of this investment type, it is easier for brands or companies to get in front of a wide range of investors who can invest as little as pocket change into your project. 

For crowdfunding advocates, this quantity over quality approach means smaller investments on a broader scope than single (or few) large investments sporadically.

If you’re still unconvinced that crowdfunding is the right option for you, there several non-financial advantages of investing your time in this type of a campaign rather than a traditional investor search. These advantages include:

  • There is no application process or thresholds for entry into the marketplace. Almost anyone can do it.
  • There are no long wait periods to receive your funds, and funds are often secured through a third-party platform.
  • It is easier to reach people outside your network, geographical area or industry scope. This exposure is key when looking to raise a significant amount of money or to gain exposure for your business or product.

Essentially, this investment platform helps to lower the barrier of access to funding and quality feedback on your business. 

No matter if you have start-up funds or not, crowdfunding is accessible and proven to work for many businesses, no matter their specific industry or goal.

What are the Benefits of Crowdfunding?

Kickstarter, a popular crowdfunding platform, has brought many products to life. (https://www.kickstarter.com/)

Beyond the obvious benefit of access to new investors and capital, crowdfunding can have other important benefits that will strengthen your business, product or initiative in the long run. 

A crowdfunding campaign is, in a way, an excellent opportunity to do focus group testing and objectively reflect on your business model’s strengths and weaknesses. 

While this feedback may seem blunt and unwelcome at times, the feedback given during a campaign is invaluable as you move your project into the next stage of development. Feedback during this critical time in your business or product development can help you pivot or play to your strengths, increasing your success in a more traditional marketplace like eCommerce.

Some non-financial benefits of crowdfunding include:

Exposure

By using a crowdfunding platform like Fundable, Indiegogo or Kickstarter, you can showcase your business or product to thousands of engaged potential investors who can see your work, interact with you and share your information with their networks.

A chance to refine your presentation

Crowdfunding is an excellent reason to refine your business model or marketing into a simple and effective strategy. 

For many new business owners, refining their vision, mission and business idea into small snackable pieces of content can often be challenging. Through a campaign, you are forced to polish your business look, marketing and branding.

Crowdfunding campaigns are simultaneously rounds of investor funding and community marketing. Learn how community fuels growth in our  Community Marketing Guide.

Organic marketing

Throughout a campaign, you can continuously and strategically promote and share your campaign through social media, online, email newsletters, or other digital marketing tactics. 

As you, and your soon to be investors share this content with their unique networks, you are exposing your brand or product to potentially thousands of new potential investors and customers.

Focus group testing of your concept

Campaigns are an excellent way to test drive your product, business idea or initiative to ensure it resonates with your target audience or consumer. Think of a campaign as a much cheaper version of focus group testing. 

As potential investors begin to express interest (or not express interest!), you can quickly find what is working for your brand and what can be further refined or clarified. This is a great way to test your business or products before going fully to market.

Efficiency

One of the primary benefits of crowdfunding is the ability to streamline your fundraising or capital generating efforts. By focusing your time, energy and resources on a central campaign, you eliminate the need to pursue investment opportunities individually. The online, digital-first format is accessible and more comfortable to manage, leaving you more time to run your business and generate funds.

Types of Crowdfunding

crowdfunding examples

Typically, there are three common forms of crowdfunding, each designed to address a specific business need or goal. 

Donation-based crowdfunding is the most common form of crowdfunding where individuals donate to a cause or business out of philanthropic kindness. This type  is often not a successful endeavour for businesses but can be used effectively for not-for-profits and other charitable causes. Investors in a donation-based crowdfunding campaign do not retain equity or receive any sort of gain for donating to your campaign. 

This type of campaign is common for support individuals or families, for donating to charitable causes or emergency fundraising efforts. The best-known platform for donation-based crowdfunding is Go Fund Me.

Equity-based crowdfunding is where small pieces of equity in a business or initiative leverage financial investment. In exchange for capital, investors receive a pre-determined portion of the equity in the business. If the business goes big, these investors earn their money back (or more!) through their equity shares.

Rewards-based crowdfunding is a simple purchase and exchange model. In exchange for funds, donors receive a reward, such as a product, service or another form of a physical item. This type operates much more like an eCommerce arrangement than traditional donation-based campaign. 

Rewards-based crowdfunding campaigns are typically used by businesses looking to promote new products or inventions. Indiegogo and Kickstarter are famous examples of rewards-based crowdfunding platforms.

Rwards-based crowdfunding is an example of a customer loyalty programs. Learn how to build brand advocates, increase your brand power, and reduce churn rate by reading  Customer Loyalty Programs – How to Make One That Works.”

Depending on your immediate needs and long term goals, any one of these crowdfunding types (or a hybrid model of two or three of them!) can help you to access new capital investment for your business.

Key Takeaways

Whether you are launching a new business, designing a new invention or looking to kickstart a not-for-profit fundraising campaign, crowdfunding can be an excellent way to get your investment opportunity in front of a wide range of investors. 

Crowdfunding is often erroneously associated with “just asking friends and family for money,” but a sound strategy is so much more than that. 

Successful crowdfunding campaigns leverage a digital footprint, marketing efforts and personal connections to help open your brand up to investors of all sizes. 

By streamlining your capital investment strategy through crowdfunding, you are opening yourself up to a whole new realm of possibilities.

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Written By Editorial Team

Along with the blog’s editors, we’re a collective of writers aimed at providing valuable industry insights and educational resources for DIY’ers, entrepreneurs, professionals and hobbyists. We range from former scientists, research students to enthusiasts and freelancers. Have a question or suggestion? Reach us at [email protected]