There has been a buzz surrounding crowdfunding and how the Internet has massive power in facilitating a large amount of money to be raised by individuals. Crowdfunding is more than just an online fundraising tactic: it is a way of mobilizing people in a fast way, but it isn’t as simple as it seems. In order to fully understand crowdfunding and the groups it can benefit the most, it is necessary to dig deep into the concept and see how it has been used in the past as well as opportunities for it in the future.
On this note, today’s post marks the beginning of a topical series in CF101. We still start by first defining crowdfunding, and later outline the different types of crowdfunding models before we highlight the growth trends in this burgeoning sector and our market predictions for this year and next. By the end of this series, we hope to equip you with a basic understanding of the crowdfunding sector.
What is Crowdfunding?
Crowdfunding is a form of alternative finance, which has emerged outside of the traditional financial system.
Crowdfunding is defined as “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.” Reward or donation crowdfunding is often done on online platforms like GoFundMe.com, Kickstarter.com and IndieGoGo.com. Businesses or individuals establish crowdfunding campaigns to raise money for a project or cause, and create a page on any of these sites. They describe the purpose of the campaign, set a monetary goal and begin sharing the page to get online donations. These campaigns have success when passed through networks of individuals with disposable income, or money that they can put towards the campaign. Some of these hosting sites take a small percentage of the money raised online before giving it to the individual.
Did you know that the Statue of Liberty was crowdfunded? A gift by the French to the US, the French paid for the construction and shipping of the statue but it was up to the Americans to fund the base upon which it would stand. With the statue ready to leave France, the Americans were still short of the $300,000 needed to build the base and erect the statue.
Running short of time the American Committee (responsible for raising the funds) teamed up with newspaper owner Joseph Pulitzer to launch a campaign to invite citizens to donate even small amounts to help in the funding of the pedestal, offering donors miniature replicas of the statue in return. This 19th century crowdfunding campaign raised $100,000 in just five months, contributed to one of the most popular attractions in the world and illustrates the financing power of a large crowd when tapped for funding.
Who and Why Should One Crowdfund?
Anyone with a convincing product or service can crowdfund. The cause doesn’t even have to be profitable. There are several non-profit or community based cause crowdfunding platforms nowadays.
As for why, there are several reasons why a budding entrepreneur will seek the crowdfunding route:
- To take advantage of the biggest global funding resource in the world: people from all over the world.
- The strategic marketing advantage of bringing together a large group of early believers with a high propensity that they will become loyal supporters and evangelists when your product launches.
- To share the risk among many, putting less financial pressure on just a few individuals.
- Cuts our banks, venture capitalists, and professional investors to create a business funding process following your own terms.
- The possibility to engage with their believers even before their business launches. Exchanging knowledge and challenging one another will only make the business plan stronger.
How to Crowdfund?
There are three main types of platforms which entrepreneurs can crowdfund from: reward, equity, and debt. We will go over these different types of platforms in more detail in our next CF101 article.
What is common amongst all – besides the fact that money is raised from the crowds via an online platform – is that a crowdfunding investing campaign is needed. One will need to figure out their “how” and “why” and have a compelling story to tell (a good videographer helps).
Your campaign should be image-rich, with just enough content to answer the predominate questions of “why should I care” and “what are you going to do with my money?” Most people don’t read so make sure all of this is in your video too. In general, it’s a good rule to not overestimate people’s attention spans so you’ll also want to keep your campaign short, around 30 days.
Last but not least, the final question you need to answer is “what are you going to give me?” (i.e. your audience). Yes, technically people are donating to your campaign but setting community based causes aside, it isn’t necessarily out of the goodness of their hearts. While it can be a little bit of that, more often than not it is a case of “that looks awesome, I want that.” This is where your reward part comes in. What do you offer to your crowd – do you offer a reward or a small equity stake?
The article was originally published on DealIndex. Interested in reading more insights on the equity crowdfunding landscape? Please download DealIndex’s “Democratising Finance” research report or register to DealIndex Dashboard.