Nonprofit

What is Crowdfunding and How Does it Work?

Crowdfunding is an increasingly popular form of fundraising that is popular with businesses, charities, and a host of other organizations. It involves collecting investment or donations from a large number of people. This allows nonprofit organizations and businesses to raise capital when traditional funding is too difficult, too expensive, or inaccessible.

If you’re interested in learning more about crowdfunding and how it works, this guide is for you. We want our readers to understand the ins and outs of this unique funding mechanism.

We’ll also overview some essential tips that can make your next crowdfunding effort a success. Let’s get started!

What is Crowdfunding?

Crowdfunding is a new way to raise money for creative projects. Instead of appealing to one source for funds, crowdfunding makes use of the power of many people. It’s not just about giving money, it’s about being part of making something happen.

This year Kickstarter, Indiegogo and similar crowdfunding platforms raised over 1 billion dollars for their users.

Crowdfunding for business

person demonstrating crowdfunding with a drawing on paper

Crowdfunding for business involves raising money (from a large number of people) to fund business operations, develop a new product, or engage in other enterprising activities. Unlike crowdfunding for charitable causes, crowdfunding for business typically involves the funders purchasing equity, providing debt, or offering money upfront for a product or service that has yet to be developed.

This type of funding is usually associated with startups and other new ventures that may not have access to traditional loans. While the crowdfunding definition doesn’t only include startups, most established companies will look at more traditional funding channels.

Crowdfunding for nonprofits

Nonprofits and charities are increasingly using crowdfunding to achieve their goals. Instead of the ‘one-time-donation’ model, crowdfunding enables charities to get ongoing donations. And because you can offer rewards linked to your cause, it’s also a way for charities to build relationships with their donors.

How Does Crowdfunding Work?

Crowdfunding can work in a variety of ways. You may decide to promote your own crowdfunding campaign, but the most common way is to use a third-party platform.

These platforms will allow you to sell equity or issue debt in exchange for money from your funders. It can be the best way to securely seek investment for your business.

Most crowdfunding platforms allow funders to create accounts and browse various businesses that are offering crowdfunding deals. Funders can then pool their money together in exchange for equity, loan repayments, or other rewards.

How much money can be raised through crowdfunding?

The amount that you can raise using crowdfunding is dependent on your needs, business size, and a host of other factors. There’s no limit to how much money you can raise.

Many businesses have raised millions of dollars using crowdfunding platforms. There’s no reason that you can’t fund the start of your business using this type of funding mechanism.

Types of Crowdfunding

Crowdfunding is a collective term that incorporates various forms of money raising. Below, let’s explore the most popular crowdfunding options in more detail:

Rewards-based

This is a popular form of crowdfunding that offers a specific reward to funders. This is a common choice for businesses that are trying to build a product.

For example, if you are attempting to build a unique backpack prototype, you might ask for funding for product development. In exchange, your funders will receive the backpack when the development process is complete. In a way, this type of crowdfunding is requesting an upfront purchase from your funders – you’re allowing customers to pay for products in the pre-development stage.

This is popular for business owners that don’t want to hand over equity or accumulate debt.

Debt-based

Debt-based crowdfunding is the process of borrowing money from your funders. As with any traditional loan, you will set payment terms (interest rates, loan term, etc.) and your business will be responsible for paying back your funders.

This is a popular option for new business owners that struggle to access traditional lending. If you don’t have a business credit score or track record, it can be difficult to convince a bank to lend you money in the early stages of your new enterprise. Allowing funders to provide debt at favorable terms can make money much more accessible.

Equity-based

If you’re seeking direct investment from funders, an equity-based approach is the best option. This means that you won’t have to worry about paying interest on debt or offering direct rewards to your funders.

With an equity-based funding option, you offer shares in your company in exchange for money. You can set the amount you expect to receive, as well as how much of the company you’re willing to sell. Funders can come together to offer money to purchase the allotted share of the company.

Donation-based

donation-based crwodfunding items including clothing, blankets, a teddy bear, and money

Lastly, donation-based crowdfunding involves funders donating money with no strings attached. This means that funders do not receive products, equity, or repayment.

This is a popular option for NGOs and charities that need to raise money for projects. Some business owners attempt to use donation-based crowdfunding to grow their businesses, but this is rarely successful. Funders do not want to enrich someone else’s for-profit enterprise without any prospect of returns.

Benefits of Crowdfunding

Raising Money Quickly

If you’re starting a new business or releasing a new product, borrowing money or gaining investment from large investors can be difficult. If you want to avoid never-ending delays in raising capital for your enterprise, then using a crowdfunding platform can be an excellent alternative with limited drawbacks.

Involving Your Customers

Crowdfunding is an excellent way to involve your customers and engage the market. When funders have a vested interest in your business, they might be more likely to buy your products or enjoy your services. This dedication can be integral to building your brand.

Public Awareness

When you seek crowdfunding, your business will likely secure a spot on a crowdfunding website. This acts as some free advertisement for your product or service. If you’re looking to get the word out about a new enterprise, crowdfunding can offer some easy publicity.

Disadvantages of Crowdfunding

No Added Experience

When businesses seek outside investment, they may also be searching for investors with relevant experience. By using investors that have experience in your industry, you can use their knowledge and guidance to help grow your business. This is why many startups may look to former startup founders for investment.

If you use crowdfunding as a funding channel, you won’t necessarily benefit from this. As you’re sourcing small amounts of money from many investors, you won’t have anyone on board that has a huge vested interest in helping your enterprise.

Uncertainty

There’s no doubt that many crowdfunding campaigns come up empty-handed. If you can’t sell your value proposition to potential funders, you might not hit your fundraising targets. After weeks of work preparing your pitch and waiting for funders to notice your offering, you might be back at square one.

Still, many other fundraising channels also carry their own risks. If you choose to target large investors for money or apply to your local bank for a business loan, there’s no guarantee that it will work in your favor. Raising money can be very tough, regardless of which avenue you choose.

Crowdfunding Examples

Below, let’s explore two notable crowdfunding efforts that have resulted in success:

1. Oculus Rift

Oculus Rift is a revolutionary VR headset that’s initial goal was to transform the gaming industry. The company gained much of its early funding from a crowdfunding campaign on Kickstarter. All in all, over $2m was raised to fund the initial prototype.[1]

Funders were offered various rewards, depending on their contribution level. Some funders were also offered prototypes that could be used to develop games for the new headsets.

As you may know, Oculus was eventually sold to Facebook in a multi-billion dollar deal. [2]. Much of the technology used in Oculus Rift inspired technology behind current Metaverse efforts at Facebook’s parent company Meta.

2. Tile

Tile is the company that brought you the sleek locator chips that are useful for tracking keys, wallets, and other necessities. The company raised over $200,000 using a Kickstarter crowdfunding campaign.

Tips for a Succesful Crowdfunding Campaign

If you want your crowdfunding campaign to be successful, it’s essential to avoid unnecessary mistakes. In order to help our readers better approach their funding efforts, we’ve developed a list of simple tips that can help you turn your crowdfunding campaign into a success:

Provide Core Details with Full Transparency

As with any investment or donation, your funders will want information that can help them understand your business or charity. Make sure to provide details about how much money you need, what it will be used for, and what you’re offering in exchange.

Offer a Clear Value Proposition

If you’re expecting funders to invest in your company or offer you a loan, you need to prove that your business idea is valuable. Creating a presentation with information on the executive team, realistic goals, competitor information, and a host of other details is essential.

In the case of a charity, you won’t be offering a value proposition that includes capital gains for your funders. Instead, you will need to show that your efforts are making clear improvements in the lives of your charity’s beneficiaries.

Use a Reputable Crowdfunding Platform

Lastly, there’s no need to approach crowdfunding on your own. Advertising and facilitating your crowdfunding efforts is very difficult without the use of a third-party platform. Many of the world’s most successful crowdfunding campaigns took advantage of various platforms that ease the process of raising money.

These platforms allow you to offer information, process funding payments and outline clear terms for your funders. With various platforms available to use, there’s no shortage of options if you want to find a high-quality crowdfunding portal to make the fundraising process smoother.

Also, funders might be more likely to trust a crowdfunding effort that utilizes a modern third-party platform. If you have your own website that processes its own fundraising payments, it may appear to be a scam.

Crowdfunding Platforms

With crowdfunding platforms being a critical element in many successful fundraising efforts, you might be wondering: which tools are available to my business? Below, let’s take a closer look at some of the internet’s leading crowdfunding platforms:

Indiegogo

Indiegogo is a platform that is synonymous with crowdfunding. So far, the platform has helped fund 800,000 enterprises. [3]

While the commission fees on Indiegogo are quite high, there’s no doubt this company is one of the first destinations for many businesses seeking crowdfunding.

SeedInvest Technology

SeedInvest Technology is a crowdfunding platform that has so far helped 500,000 individuals invest in startups. It has become a popular gateway for crowdfunding because the startups posted on the site undergo due diligence and other legitimacy tests.

GoFundMe

GoFundMe is emerging as one of the leaders in charitable fundraising platforms. Many of the platform’s campaigns include donations for disaster relief, medical expenses, and other charitable causes.

How Paysley Makes Crowdfunding Effortless

Paysley allows clients to fundraise using a variety of built-in tools. If you want to generate revenue via donations or other crowdfunding channels, paysley’s donation platform allows you to build fundraisers, market campaigns, and process payments.

Users can use QR codes, payment links, text message payments, and other useful tools to process donations. This allows paysley clients to quickly generate a fundraising campaign without the use of additional third-party platforms.

Is Crowdfunding Worth It?: Final Thoughts

Now that you understand the meaning of crowdfunding, as well as the pros and cons of this fundraising mechanism, it’s time to ask yourself: Is this form of funding correct for my business?

In reality, most businesses tap into a range of funding channels when it’s time to raise money. If you want the best chance of accessing the funds you need to grow your enterprise, it’s worth considering crowdfunding as an option.

Sources:

  1. Kickstarter. “Oculus Rift: Step Into the Game
  2. Guardian. “Facebook closes its $2bn Oculus Rift acquisition. What next?
  3. Forbes. “Greentech Is On The Rise And Crowdfunding Platform Indiegogo Is Leading The Charge.”