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The Way Crowdfunding Works

Posted by Lilith on Sep 11, 2018 5:00:00 PM

Do you have a product or project to launch? Are you looking for access to working capital for this? Why not go for crowdfunding? This article will tell you about crowdfunding, how it works, and what benefits it offers to enjoy.


Crowdfunding: What Is It?

First, let’s see what crowdfunding is. Well, crowdfunding is the process of funding a project or venture by raising small amounts of money from a large group of people. This is primarily being carried out online via social media and crowdfunding platforms. So, this type of fundraising is a form of crowdsourcing and alternative finance.


Crowdfunding appeared long ago and has more than one roots. Did you know that books have been crowdfunded for centuries? Authors and publishers used to advertise book projects in praenumeration (an early form of the subscription business model) or subscription schemes. If the number of subscribers to buy the book once it was out was enough, the book would be written and published.


Crowdfunding on the Internet first became popular and turned into a mainstream in the fields of art and music. The first noteworthy case of online crowdfunding in the music industry dates back to 1997. This was the year when fans underwrote an entire US tour for the British rock band Marillion and raised US$60.000 in donations through a fan-based online campaign.

marillion band

Thanks to crowdfunding, entrepreneurs get an opportunity to raise hundreds of thousands or millions of dollars from people ready to invest. Crowdfunding websites generate revenue from a percentage of the funds collected. Kickstarter and Indiegogo are famous crowdfunding platforms that attract hundreds of thousands of people ready to invest in the next big thing.


Kickstarter is the biggest crowdfunding platform nowadays. The website was founded in 2009, and since those times, it has funded over 130.000 projects successfully. More than $3.5 billion dollars have been raised for all the projects on Kickstarter.

The next one, Indiegogo, was developed in 2006 as a crowdfunding site aimed at raising money for independent films. However, a year later, the platform began accepting projects from all different categories.

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As compared to Kickstarter, Indiegogo is less strict and offers more flexibility. Specifically, fixed and flexible models account for the major difference between these two crowdfunding platforms.


The Way Crowdfunding Works

People use crowdfunding to bring to life their artistic projects, products for sale, as well as personal ventures. So, if you’re an entrepreneur, you can use a crowdfunding platform to build, showcase, and share your pitch resources. In fact, such approach has recently drastically streamlined the traditional model.

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What about the traditional model? Well, it used to require spending months turning to your personal network, finding potential investors, and having enough money and time to get in front of them. Today, it has become much easier to get in front of more interested parties and offer them more ways to help you take your business to the next level.


Based on a report recently published by Goldman Sachs, crowdfunding serves as "potentially the most disruptive new model of finance.” By the way, the World Bank forecasts that crowdfunding investments will account for $96 billion yearly in developing countries by 2025.


Benefits of Crowdfunding

To grow your small business, you’ll need to get funding for it. The reality is that your business may not qualify for financing from a bank or other financial institution. That’s where crowdfunding steps in!

In recent years, this type of fundraising has provided entrepreneurs with an amazing alternative to traditional loans. Crowdfunding boasts a number of benefits over traditional methods of fundraising. Here they are:

  • You get access to thousands of accredited investors who can see, interact with, and share your fundraising campaign.
  • You obtain not only the capital you need to take your business off the ground, but also an audience who have gone through a hard time together with you right from the very start. Beyond that, you get followers on social media platforms, as well as enjoy online coverage.
  • You get an opportunity to look at your business from above. A bird’s eye view over the history of your product, traction, offerings, addressable market, value proposition, etc. enables you to reveal the pain points and improve your project or product.
  • You can share and promote your campaign through social media, email newsletters, and use other online marketing tactics to enlarge your reach.
  • As soon as potential investors start expressing interest in your project or product and ask questions, you get another opportunity to find out if something is missing. This is a process that reveals all the features and nuances that would make your product or project more appealing to the market.
  • You centralize and streamline your fundraising efforts. You get a chance to present your product or project online in a format that’s much more accessible. Thus, you’ll devote more time to running your business. So, you get rid of the process of printing documents, compiling binders, and manually updating each of them in case of an update.


Tips for a Successful Crowdfunding Campaign

Below you can find several tips that can help you run a successful campaign:

  • Turn to your social network. Donation doesn’t necessarily mean large amounts of money. Even smaller ones can help you with your crowdfunding campaign.
  • Create a well-thought marketing plan. This is especially important for those who’ve chosen to use Kickstarter or Indiegogo. Focus on transparent marketing through social media, video, and email. All these tools can help you reach out to more and more people.
  • Video is everything these days. Create a crowdfunding video that’ll represent your project in detail. Personalize your goals and get people excited.
  • Determine the amount of money you need. Crowdfunding platforms are going to charge you some fees, so know what you’ll be charged. Remember that your goal should be adjusted to all this.
  • Offer benefits to your backers. Thanks to their donations, you’ll be able to finance your business. What will your backers get?

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As you see, the basic crowdfunding model is straightforward. Individuals or companies present whatever they need to get financing for. Project creators offer benefits to people ready to finance them. So, don’t lose your time! Build a solid crowdfunding campaign and enjoy the opportunity of taking your business to heights!

Tags: Crowdfunding