1. What is crowdfunding?
Crowdfunding is an alternative method of raising money to finance different kind of purposes. The concept of crowdfunding is to gather a large group of people(the crowd) who fund small amounts of money to eventually reach the total amount desirable for financing the purpose.
Crowdfunding is used by all kind of people and groups like entrepreneurs, charities, companies and privates. The different purposes wherefore crowdfunding can be used are from raising money to finance a new car or a vacation, making a movie, to the startup of a company or developing an innovative idea. The purpose can be everything, just as long people are willing to invest into the idea.
The difference between crowdfunding and traditional fund raising is that crowdfunding needs to attract a large group of people who all donate or invest a (small) amount of money to eventually reach the total amount needed. A traditional finance is mostly done by attracting one or two organizations or businesses who invest the total amount of money needed, it can also be a loan from a bank or other financing institution. I think you can see crowdfunding as getting money from a bank where the bank as intermediate is ruled out. Normally a bank collects money from a lot of different people(their customers savings) and then they loan the money to others who need it. The bank in this role takes all the risk and chooses what to finance and what not. When the bank is ruled out you get crowdfunding, the difference is that you need to attract the people who are willing to invest in your purpose. the investors decide what purpose they want to finance and take the risk themselves so it can be hard to get enough people to fund a project.
2. Crowdfunding models
There are three different crowdfunding models which can be used:
Reward based Crowdfunding model
Equity based Crowdfunding model
Microfinance lending model
When using reward based crowdfunding, people who make an investment are rewarded in some way, normally there are predefined rewards for different amounts funded. An example of this is a crowdfunding project where money is being raised for making a special hamburger sauce. If people donate more than 5dollar they will receive a sticker of the company. If they donate more than 10dollar they get a bottle of the sauce, more than 35dollar they get a t-shirt and a bottle of the sauce and so on. Mostly it’s the more someone funds the better the reward is.
People who fund a company which raises money using equity based crowdfunding, get a share in the business in exchange for the money invested. This model is used by startup companies as by existing companies who want to expand and need money. An example of this model is the company called Financial Fairytales who offers 20% equity to people who invest in their company for expanding their business in the UK and abroad.
People who invest money in a microfinance lending model get a financial return and/or interest at a future date in exchange for the fund they made. For example: A person needs money to finance his wedding and started a crowdfunding at a platform with the microfinance model. When someone chooses to fund this person, the reward is to get the funded money back within 3years with an interest of 8,20%
3. Crowdfunding platforms:
When the product, business or whatever you are hoping people want to invest in is clear and the crowdfunding model as well, you can start looking at crowdfunding platforms. The concept of an crowdfunding platform is that you can put your project on their website to get potential investors who surf on their sites to come in contact with your project. To choose the right platform you will have to consider a few things. First of all the crowdfunding websites also want to earn money. Crowdfunding platforms often ask for a percentage of the raised funds. Some platforms provide different kinds of percentages with different kind of crowdfunding. This also depends if raising the money is successful or not. There also has to be paid a percentage for processing the money. This can be credit card processing or paypal costs for example. Besides the percentages of money the platforms ask it is also important you look for a platform that fits with your project. There are a lot of platforms but some are especially for a kind of project. There are sites for only apps, art, sustainable energy, and a lot more. So it is possible that if a project is a certain kind of project it would be better to put it on such kind of platform then on a big more known platform for all kinds of projects. On the smaller platforms often the real potential investors for a kind of project come there. Deciding which platform to choose also depends a little bit on where you live. Some platforms are restricted to certain countries .
Kickstarter is one of the best known crowdfunding platform out there. Kickstarter uses a reward based crowdfunding system. In total they already have successfully funded 60.288 projects with a total of 1.077.532.001 dollar pledges to these projects. These projects where funded by 6.015.234 Total backers, 1.788.488 Repeat backers, and in total 14.716.194 pledges.
Here it shows that the most successfully funded projects on kickstarter are from 1.000 till 9.999 dollars.
If a project is successfully funded, Kickstarter applies a 5% fee to the funds collected. For US-based projects, pledges will be processed by Amazon Payments, while pledges to non-US projects will be processed securely through a third-party payments processor. In either case, these payment processing fees work out to roughly 3-5% .
successful kickstarter project
The pebble e-paper watch: this is a watch that can connect to your smartphone true Bluetooth, alerting you for messages and calls. And it even can use apps. This project was trying to raise $100.000 but they eventually raised $10,266,846 this is more than 100 times the amount they asked for .
If you want to raise money for a cause or for yourself GoFundMe is a really good platform to do this. This platform also uses a donation based system because there is often no possibility of rewards with this kind of projects. Gofundme does take 5 percent of every donation.
Successful GoFundMe project
A very successful GoFundMe project was for a women who got injured in the Colorado theater massacre. She didnt have health insurance but needed medical assistants. She raised $171.525 .
This platform uses the equity based model and is more focused on the starting entrepreneur. It tries to make the investors get very connected with the company and encourages the investors to help the company build a profit because the equity u get is based on the profit the company will make.
4. How to make a crowdfunding project successful
First of all its important that before you start a crowdfunding campaign you put time, energy and even money into the project. If you have done research on your idea or project you should know if the project is a good idea or not. This is of course important before starting a crowdfunding campaign. With a donation based project this is not necessary. After doing research and defining the project its important to search a platform that fits best with your project. This has been explained in the chapter crowdfunding platforms.
Set a smart funding goal
Setting the right funding goal is often not as easy as it looks. You probably know how much money you want to raise but is this the same amount you really need. Very important is that your goal is enough to cover all the expenses and there are often more expenses then predicted. But you also dont want to set a to high of a goal because some platforms use the system that the full goal must been accomplished or you dont get anything at all. Also it is sometimes better to lower your funding goal because it will get a higher percentage quickly on the platform and people like backing winners.
Make an effective pitch
When starting a crowdfunding campaign it is important to let the people know what your project is about and what exactly you need the money for. But to create attention for the project you will have to create a story behind it. With a story you can connect with funders so they will invest quicker. In the story there should be something about why you started the company and how it can affect peoples lives. Telling people about your project and story is best done with a video. Because letting people watch a video is way more useful than having to read a bunch of text.
A campaign video can create some interest to your project but people could be interested but still wont back the project. A good way of getting even more interest is providing some kind of rewards for backing your project. By creating more different kind of rewards and some even with a limited edition, people will be more interested. Often rewards for a high amount of the investment got a limited edition or a very special reward, this persuades people to invest more than they actually wanted to do.
Only putting your project on a crowdfunding platform with your video and pitch is often not enough. This is why its important to also create some kind of marketing around your project. A great way to start your marketing campaign is a social media promotion campaign.
Interact with supporters
If you keep in contact with your funders by keeping them informed about the progress and responding to their questions they will feel more involved. The supporters will keep interested in your project and maybe even create more funder. It is also possible the supporters will give feedback on your project or even fund more than they already did. This can lead to a positive change and possibly a successful crowdfunding project.
5. Crowdfunding process:
When raising money using crowdfunding first the purpose of the money and the amount needed needs to be determent and professionally worked out. After that the right model and platform needs to be chosen. Then the reward(s) and deadline should be determent. making a pitch to make clear for the investors what they are funding can be also very helpful. When all this is done the process can be started.
Crowdfunding can only work when enough investors know about the project. A platform will help with the promotion, but a marketing campaign or active social-media promoting can be also very helpful to fulfill the goal. So this should be also done before and during the crowdfunding process to be sure of getting a successful fundraise.
When the funding goal is reached the last step of the process can be started and that’s closing the fund and rewarding the funders with the promised rewards.