How Crowdfunding Works and All You Need To Know About Crowdfunding. Plus 10 crowdfunding tips for a successful campaign
This article will explain to you in detail how crowdfunding works. These days people resort to platforms like Kickstarter and Indiegogo or create a committed website in order to raise funds for several ventures when they do not have the resources to bring their dreams to reality. In some cases, the funds are raised for the launch of a new product while sometimes, funds are raised for the sake of either charity or even an adventurous trip.
In fact, the trend of crowdfunding has grown and become accessible to just about anyone irrespective of your reason for seeking funds.
You may be wondering what the meaning of crowdfunding is, and how companies are able to use this platform in making money. Truthfully, for a crowdfunding campaign to be successful, there are several elements that go into it, and if you’re just starting, the best thing to do is learn everything about it before delving into it.
The Meaning Of Crowdfunding?
Simply put, crowdfunding is the act of taking money from several individuals or sources in order to sponsor a new project. Most times, crowd funders resort to social media to share their platform or idea with the aim of triggering others to donate to the crowdfunding campaign.
The essence of crowdfunding is to rule out the back-and-forth financial issues between entrepreneurs and investors. This gives them the avenue to directly seek financial support from interested people instead of waiting for the opportunity to pitch their product idea to a team of investors to present itself. Invariably, there is a significant reduction in the waiting period between having an idea and raising the funds.
A brief summary of how crowdfunding works
From all we have said, it may sound like a simple thing to do, but you may want to find out how it truly works. It is correct that campaigns for crowdfunding occasionally ask for financing in the form of investments or donations, though we are here to tell you that this is not always the case. Some of these crowdfunding campaigns offer an incentive, like giving you special access or pricing at the takeoff of a product.
It is necessary that you set up a fundraising goal when setting up a crowdfunding campaign which is normally the amount you need to bring your project to fruition. By setting a time limit for your campaign, you will indirectly create a sense of urgency. The time limit ranges from a few weeks to some months.
What are the six major types of crowdfunding
You should note that we have a few various methods of crowdfunding, this is why what is applicable for raising funds to kick start a business may not be applicable for someone who wishes to raise money for charity. This is why it is pertinent that you understand the benefits of various types of crowdfunding to know the one that best suits your goals and campaign.
Below we have six types of crowdfunding campaigns, let us look at them and the best way to use each one:
Reward
Most suitable for: Entrepreneurs who are selling or producing products that are client-facing
Well-known platforms: Kickstarter, and Indiegogo
The moderate crowdfunding amount: A maximum of $100,000 or less
This type of crowdfunding incentivizes people to fund a project because, in return, they’ll earn something. Ideas like new tech products or other creative ventures released by startups usually go for this type of campaign.
Also, as a contributor, you will be offered tiered donation suggestions, with each level of donation providing you with a particular prize. Let us look at a company that is seeking donations to create a new weather-proof backpack, for instance, might offer a discount when they launch the product for people who donated about $20 while a free backpack will be offered to those who donated a $50 donation.
Donation
Most suitable for: Non-profits, and charities
Well-known platforms: GoFundMe, and FundRazr
The moderate crowdfunding amount: About $10,000
Crowdfunding campaigns based on donations are usually organized by nonprofits or other charitable organizations to raise funding and support for their course. Most times, you’ll see smaller nonprofits or local organizations utilizing platforms such as GoFundMe for a particular cause as donations to purchase animal shelter supplies while bigger NGOs or charitable organizations run campaigns directly using their own platforms in most cases.
In addition to this, there are certain individuals seeking donation-based fundraising to assist them in covering the costs of the main event such as a medical procedure or home renovation caused by a natural disaster.
Peer-to-peer
Most suitable for: People seeking a personal loan
Well-known platforms: LendingClub, and Prosper
The moderate crowdfunding amount: Personal loans beginning from $40,000
This is also known as debt crowdfunding which means that people seek out loans from other channels such that they do not need to go through the conventional route of applying through a bank. What platforms such as LendingClub and Prosper does is connect lenders with people seeking loans by depending on crowdsourcing.
One of the advantages of this type of fundraising is that you can easily access funds quickly, securely, and in a way that is available to just about anyone because it is most difficult for a bank to approve a loan.
Real estate
Most suitable for: Anyone who wants to invest in real estate with the exemptions of complications
Well-known platforms: RealtyMogul, and Fundraise
The moderate crowdfunding amount: Depending on the project, a minimum of $1,000-$100,000 investment
Please just before you get too excited, you are not crowdfunding to afford your first home, it is for anyone who wants to invest in real estate but wants to mitigate all the red tape that accompanies real estate, such as dealing with contracts, brokers, or agents. What this platform basically does is permit contributors to support a particular real estate project in exchange for equity in the property.
The real estate projects funded are mostly commercial buildings and it works well for donators because it provides an easy, flexible, and low-cost alternative to investing in real estate.
Equity
Most suitable for: Businesses or startups
Well-known platforms: AngelList, SeedInvest
The moderate crowdfunding amount: From $100,000 upward.
Investors of Equity crowdfunding are given the opportunity to invest in private companies or new startups, nevertheless, this is neither the same rewards nor donation-based crowdfunding, instead, it is a more common way to raise money for the purpose of business. You will have a stake in the company as an investor that aligns with your investment.
Most startups prefer this platform because they are given the opportunity to show their product or idea to a large number of investors and unlike with more traditional forms of investments, investors do not have any form of ownership of the company, invariably, they have no control over the business.
Royalty
Most suitable for: Businesses and startups
Well-known platforms: AngelList, and Quirky
The moderate crowdfunding amount: It is between $5,000-$250,000 but this depends on the project
This is mostly used by businesses that are not interested in giving away too much of their revenue from all their ventures. Let us take, for example, if a startup is developing a new app that runs on subscriptions, to complete the project, they might require funding. In this type of campaign, investors will receive their money back but this can happen only after the product launches and generates revenue.
This means that Royalty-based investors unlike other forms of crowdfunding do not have a stake in the business and can only get their money back from the particular project they invested in and have no business getting their money from the company or startup as a whole. Nevertheless, once the app we earlier mentioned earns money from subscriptions, donators are eligible to earn royalties on the basis of the amount they invested.
A summary of the ten crowdfunding tips for a successful campaign
You are prepared to launch your campaign and start earning investments after selecting the type of crowdfunding campaign website you want to use.
The mistake most entrepreneurs make is to think that their idea is one-of-a-kind and that alone will translate into investments from donators not knowing that there are multiple entrepreneurs who have the same or similar idea and are also seeking funds on the same platforms as you are. Your best bet is to make sure that your project is excep[tional and will attract the right contributors.
We have taken out time to give you the best crowdfunding tips for a successful campaign.
01. You should tell a story
Do not make the mistake of delving straight into promoting your startup or product. You have to sell it with a convincing story to give donators an idea of the foundation of the project’s roots and make sure to tug on a few heartstrings. Let them know the problem you are going to solve with your new venture, what you wish to achieve, or how you kick-started.
02. You should create an intriguing video
There is every possibility that a well-made video will go viral, and you will agree with us that this is exactly your target when looking for investments. In summary, tell your story in a more creative manner instead of just a block of text, go the extra mile to pass your message across.
An average person is exposed to lots of campaigns on a regular basis, therefore, it is advisable that you concentrate on spreading news and updates of your campaign on social media, this way it can reach as many people as possible. A combination of strong content and a good call-to-action should be able to do the magic of drawing attention to your crowdfunding campaign page.
04. You should create an open line of communication
It is good that you are able to communicate effectively because sometimes, donators may want to find out what’s going on with the money they’ve invested. Let them know if there was a delay in production, or need to increase your target fundraising goal. The summary of the whole thing is for you to be transparent in what’s happening with your business and make sure to provide them with regular updates of your progress both during and after the campaign. Maybe, your contributors may turn into your loyal customers.
05. You should create room for different giving levels
Well, this tip is mainly for rewards and donations-based crowdfunding campaigns, you can reach a wider range of donators if you provide options for lower-level donations. This is because it is not everyone that can afford to invest or contribute hundreds or thousands of dollars, but offering a reward, even for a small amount will prompt them to participate and engage with your campaign.
06. You should stalk the competition
It is advisable that you keep checking what your competitors are doing, this will enable you to be ahead of them at all times. In your research phase, look out for your competitors, this way, you will have a knowledge of what crowdfunding in your niche looks like and how they went about theirs that worked for them in the past.
07. You should know your budget
Initially, you might think that crowdfunding entails earning money initially, but you have to consider what it cost to run a campaign. Even if you are hiring people to assist you in running your campaign, designing a new website, or if you need to pay money to the crowdfunding platform, you should consider the costs and add it up at the onset.
08. You should concentrate on the first 48 hours
The first 48 hours after the launch is a critical period because this is when you need to build momentum if you want to build a successful campaign.
09. You should be creative with rewards
Endeavor to find other creative rewards to incentivize them to invest aside from offering them a product or a discount. This is a great idea for charities or nonprofits that don’t have any rewards to give, rewards such as a personalized thank you video, dinner, or organizing an event in their honor.
10. You should deliver as promised
Finally, the best action you can take after a campaign is over is to deliver exactly what you promised your donators. There should be no room for disappointment, we will like to remind you again to be transparent about updates or expectations because under-delivering or failing to deliver will have a negative impact on the success of any future crowdfunding campaigns you do.
SEE A LIST OF BEST OF THE BEST OF CROWDFUNDING WEBSITES TODAY
WATCH BONUS VIDEOS ON HOW CROWDFUNDING WORKS BELOW:
video: 6 Ways to Run the Most Successful Kickstarter Campaign