Curious about what is crowdfunding? It’s a modern way to raise funds by collecting small contributions from a large number of people, usually via online platforms.
In this article, we’ll break down the types, pros, and cons of crowdfunding, providing you with everything you need to know about this increasingly popular form of financing. Let’s get started.
There are three types of crowdfunding:
- Crowdfunding With Equity – Investors get shares or profits.
- Rewards/Donation-based crowdfunding – Money comes in through donations. There’s a rewards program, Usually a product or service.
- Debt Crowdfunding – Early-stage companies attract investors who charge high-interest rates for business loans and the amounts are small.
This system works well for real estate investing as investors commit lower donations or capital towards any single property. It’s a great way to diversify your stock market portfolio. You just need to lock in the money for several years.
This is good for developers too. It allows them to get a big variety of investors. These developers can go to social media networks to get donations. Take note. A change in the 2012 Jobs Act provides more access to the US real estate market and crowdfunding.
Even though you can invest smaller amounts, most sites want you to be an accredited investor.
How Crowdfunding Works
The essence of a successful crowdfunding campaign lies in its ability to raise relatively small amounts of money from a large, diverse group of people.
This stands in stark contrast to traditional business loans or investment rounds, which typically involve fewer, larger investors.
While it might appear at first glance that setting up a crowdfunding campaign is a straightforward task, achieving real success requires a thoughtful strategy, meticulous planning, and considerable effort.
Here’s how crowdfunding works.
- You need to create a profile regardless of the crowdfunding site you use. Graphics and product images help to raise money. Most involve a pitch video and some supporting content.
- There is usually a subscription fee to fund projects. A payment processing fee can cost 2.9% and o.30 for each transaction. Along with the transaction fees, platform fees range from 3 to 5 percent.
- Setting a goal for raising funds is essential. Some crowdfunding platforms will let you collect money even if your goals fall short, but others won’t. So small business owners need to be realistic.
Small businesses need to consider their annual sales before they come up with the gross campaign sales number. Getting some investment advice is helpful. It can dictate the point where you should stop raising money to ensure success.
- Corralling backers before your crowdfunding projects launch is important. And it involves marketing your business venture. Successfully funded campaigns send consistent updates through email and social media.
- You can collect funds from the most successful campaigns. The reward of crowdfunding shows successfully processed payments into your account. A crowdfunding equity platform has you work with investors to close the deal. Here’s some more information about the payout fees for GoFundMe.
Tips for Successful Crowdfunding Campaigns
Crowdfunding for business is a great way to get a startup going. Here are five tips to get you started, and remember there are legal requirements with each of these.
Start With a Community
Launching a crowdfunding campaign on any platform benefits significantly from first building a supportive community.
This involves strategically reaching out to media personnel, bloggers, and social media influencers who can help create a buzz about your project. Although this approach is beneficial across all crowdfunding types, it’s crucial to remember that success often boils down to a numbers game.
While you’ll want to be discerning in who you approach, you also don’t want to overly narrow your outreach efforts, thereby limiting potential support.
Offer Good Incentives
Rewarding your backers with appealing incentives, such as branded hats, caps, or T-shirts, can entice them to contribute more generously. Implementing different reward tiers provides backers with options and creates a sense of exclusivity.
Media shout-outs and other social recognitions can also influence the average contribution size. While it’s tempting to offer a plethora of choices, simplicity can be your ally.
Overcomplicating rewards with multiple bundles and add-on options may confuse potential backers and discourage participation.
You Need Good Copy
Generic, cookie-cutter taglines and descriptions won’t inspire excitement or urgency in potential backers. To truly capture attention, your campaign must feature unique, compelling copy.
Personalize your communications by integrating notable milestones, achievements, or testimonials. Prioritize the creation of quality media assets, including photographs and videos, to make your campaign stand out.
Sharing a succinct but impactful business or project story can also lend credibility and evoke emotional investment from potential backers.
Don’t Ignore Analytics
To optimize your campaign’s performance, it’s crucial to regularly monitor and analyze key metrics. Utilizing analytics tools can give you insights into campaign traffic, contribution patterns, and overall engagement.
Understanding these numbers allows for timely adjustments to your strategies. Moreover, being transparent about how the funds will be used can boost backers’ confidence in your campaign.
Update Your Page
A stagnant campaign page is a red flag for many potential backers. Regular updates featuring new photos, content, and progress reports are crucial for maintaining donor interest.
Posts should be engaging yet concise, and incorporating multimedia elements like videos and the latest imagery can significantly enhance your campaign’s appeal.
Keeping your audience abreast of milestones or challenges not only fosters trust but also encourages ongoing engagement and support
4 Crowdfunding Platform Types for Your Startup
Maybe you’re looking for angel investors for an equity program, or something more low-key. Either way, here’s a list of the most common types of business crowdfunding.
Equity CrowdFunding
Equity crowdfunding lets groups of investors fund businesses and startups. They get equity for supplying cash. Equity-based crowdfunding is different and unique from other types of funding. The business plan here targets a larger group of investors.
Here’s a list of some equity crowdfunding sites.
Debt Crowdfunding
Investors supply the capital upfront. They get the money back plus interest.
Donation Crowdfunding
Get a large number of people to donate small amounts. There are no promises made to investors to repay or revenue-sharing deals made.
Reward-Based Crowdfunding
Startups don’t need to give up shares, or equity. Rewards are centered around the services or products for sale.
Comparing Types of Crowdfunding Platforms
The crowdfunding landscape offers a diverse range of platforms, each catering to different needs, investment types, and industries. The following table provides a quick comparison of popular crowdfunding platforms, focusing on key features that matter to both campaign creators and investors.
| Platform | Type of Crowdfunding | Target Audience | Key Features | Fees |
|---|---|---|---|---|
| Kickstarter | Reward-Based | Startups, Innovators | Google Analytics integration | 3-5% + transaction fees |
| GoFundMe | Donation | Personal, Small Biz | Social media integration, No deadlines | Transaction fees only |
| WeFunder | Equity | Early-stage Startups | Open to high & low net worth investors | Minimum of $100 |
| Fundly | Donation | Charities, Individuals | No startup fees | $.30 per transaction |
| Experiment | Donation | Science Projects | Reviewed before launch | 3-5% |
| Chuffed | Donation | Social Causes | Donors pay fees | $3 on every $100 |
| Crowdfunder | Equity | Seed-stage Companies | For accredited investors only | At least $299/monthly |
Top Crowdfunding Sites for Raising Money
Crowdfunding for small businesses means sorting through crowdfunding sites, like the ones that are listed here. Make sure to look for the best features such as marketing tools, user-friendliness and customer support. The ones listed below supply proven results for crowdfunding campaigns.
Kickstarter
This is one of the reward-based crowdfunding leaders. Keep in mind you can raise capital here but Kick starter doesn’t fund charitable causes or personal expenses. It’s a leader as far as crowdfunding websites go because it offers Google Analytics integration.
GoFundMe
This site is a crowdfunding success at least partially because of its flexibility. Get small business funds raised here with an easy and fast setup. Plus there’s social media integration and no deadlines or goals to get your funding.
WeFunder
This ranks as one of the best crowdfunding sites for early-stage tech startups. Investors get rewards for contributions. Plus, this site is available to both high net worth and non-high network investors. There’s a company-wide minimum of $100.
Fundly
This crowd funding site is a little different. It’s made for charities and individuals with no startup fees involved. The payment partner does take a $.30 per transaction fee for credit card processing.
Experiment
This is crowdfunding for science projects and experiments. Payment processing fees here are roughly 3 to 5% and each submitted project is reviewed before it’s launched. Here’s some more information on how this crowdfunding site works.
Keep in mind that you don’t need to reach your funding target crowdfunding campaign here. There’s no cost if you don’t because no one gets charged. Projects are excepted from Australia, Canada the UK, and the US.
As a creator, you never give up ownership. Any project that you create is always yours.
Chuffed
This is a site that deals with socially conscious type projects. Social enterprises, not for profits and community groups are the focus. There are some common campaigns here including funding for social programs or products. Organizations or individuals looking for money for other things like animal vet bills can use this site.
Any crowdfunding campaign here don’t charge fees to those running the campaign itself. The donors pay the payment processing fees which work out to about three dollars on every $100 donation. And if you are so inclined, you can offer to tip Chuffed.
Crowdfunder
This is a good equity crowdfunding site for seed-stage companies. They don’t charge a percentage of what you raise, but they only allow accredited investors. That’s partially defined as people with incomes of $200,000 and $300,000 over the last two years.
This isn’t the place for you if you’re looking to raise money for personal issues or causes. These accredited investors also include investment advisers and registered brokers.
There’s no percentage fee for the amount you raise. However, you’ll need to pay at least $299 monthly to use the platform. This type of monthly fee needs to be considered.
Fledgling companies need to look for features like convertible note funding. This is used when pre-money valuation hasn’t been carried out which can be converted to equity.
What is a Disadvantage of Crowdfunding?
There are administrative fees and other hidden costs to consider when launching a crowdfunding campaign. For instance, some crowdfunding platforms may charge a commission of up to 5% on the total funds raised.
In addition, there may be payment processing fees that range from 3% to 5%, depending on the payment gateway you or the platform uses. These fees can eat into the funds you’ve worked hard to raise, diminishing your final takeaway.
Before you dive into a crowdfunding campaign, it’s crucial to read the fine print on the platform you’re considering. Some platforms operate on a subscription model, requiring monthly payments that could be a burden on a startup or individual with limited resources.
Moreover, understanding the timing of fund disbursement is essential. Some crowdfunding platforms have a hold period, making you wait 60 to 90 days before you can access the raised funds, which could impact your project timelines or cash flow.
Additionally, there can be other “success fees” that are less obvious but equally impactful on your budget. For instance, some equity crowdfunding platforms charge legal reimbursement expenses that can take up to 60 days to process.
These extra fees can add another 7.5% to the overall cost of your campaign.
Being aware of all these potential fees and charges will help you set a more accurate fundraising goal and prepare for any financial obstacles that might arise.
Image: Envato Elements
This article, "What is Crowdfunding?" was first published on Small Business Trends
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