What is Crowdfunding and How does it Work?

Crowdfunding – A Financial Avenue Of The Future

  1. Introduction – The Backstory Of Crowdfunding
  2. Early History (pre-2009)
  3. What Is Crowdfunding
  4. Major Crowdfunding Platforms
  5. How Crowdfunding Works – Process Overview
  6. Top Reasons To Choose Crowdfunding For Your Business
  7. Avenues For Future Growth

Introduction – The Backstory Of Crowdfunding

Crowdfunding is the practice of raising funds for a project, venture, social, or community project by raising arguably small amounts of money from a diverse crowd or selected group of individuals. Usually, crowdfunding projects pool people into a cohesive community based on shared interests like – values, financial gain, support for an idea or cause, passion for a specific field, object, or service.

Crowdfunding is mainly perceived as an alternative way of funding to the traditional models. It’s regarded as being particularly useful in situations where traditional models may fail. In 2019 alone, over $6.9Bln, for over 10940 projects. Year by year, it’s metrics increase in double digits, showing stable growth around the 30% mark both for transactional value and number of campaigns. All this only in the last ten years. Spurred by this surge of popularity, we decided to go in-depth and offer you all the information you need to understand this phenomenon. Leverage this information into power if you consider the decision to take part in the crowdfunding sensation.

Crowdfunding may seem like a new idea, but it actually has a long and rich history with roots going back to the 1700’s.

Although similar concepts can also be executed through mail-order subscriptions, benefit events, and other methods all these differ in fundamental ways as we will show later on. Today the term ;crowdfunding’ mainly applies to online, digital outlets of this funding avenue. The modern crowdfunding model is generally comprised of three elements, partaking in a dynamic process: the project initiator who proposes the idea or project to be funded(project creator), individuals or groups who support the idea(the crowd), and a moderating organization (the “platform”) that brings the parties together to launch the idea.

Crowdfunding has been used to fund a wide range of for-profit, entrepreneurial ventures such as artistic and creative projects, medical expenses, travel, and community-oriented social projects. Its use has also been criticised for funding fraudulent or ludicrous campaigns (the Kickstarter campaign for making a sandwich is a good example that comes to mind).

Early History (pre-2009)

There are many recorded cases of successful crowdfunding campaigns dating back from the 1700s. Although the term may be inappropriately applied to some, they show the power this funding model possesses.

The first historical examples that may come to mind are books, funded through the popular subscription model in centuries XVIII-XXth. Although this is not exactly crowdfunding since money would be transferred to the publisher/writer only upon received the book. This simple pre-order system has been greatly expanded ever since and used successfully in a host of connected industries.

A famous example of this is Alexander’s Pope first translation of the Illiad in English in 1713. Pope required his readers (subscribers) to send in advance the money needed to pay the printer. Thus the rewards-based crowdfunding model is born. Another famous example is Mozart, seeking funding with a similar process for financing a performance of three of his newly written concertos at a Viennese Concert Hall. Successful only in his second attempt, Mozard offered his backers to be ‘named in the official composition manuscript’ and receive their personalized copy of the sheet music.

London’s merchant guilds saved the Bank of England in the 1730s when clients demanded to withdraw their pounds into gold – they sustained the money until trust in the pound was restored, thus crowdfunding their currency. A well-known illustration of functional crowdfunding is Auguste Comte’s project to issue notes for the public assistance of his further activity as a philosopher. The “Première Circulaire Annuelle adressée par l’auteur du Système de Philosophie Positive” was published on 14 March 1850, and many of these dispatches, blank and with sums have remained.

Finally, we have to mention Joseph Pulitzer’s campaign to fund the pedestal on which the 30-feet tall Statue of Liberty now stands. Pulitzer used his own newspaper, The New York World, to popularize the project. People could contribute $1 or $5 for two levels of reward. The campaign worked, raising money to cover the cost from more than 160,000 donors in just five months. It’s perhaps the first-ever example of using high-profile media to popularize and run a crowdfunding campaign.

Thus we arrive in contemporary times, to the year 1996, to be precise. It is in 1996 that the first-ever crowdfunding campaign was run over the internet. The project: rock band Marillion’s US tour. The crowd: their fans came together, through their online fan-base forum, to support the tour when the band had to cancel it due to lack of funds. Thus the internet medium became the primary way in which crowdfunding campaigns are run, advertised, and managed. This is the seed moment for all subsequent platforms.

A bit later, Artistshare emerged in 2000 as the first rewards-based platform for “fan funding.” Artistshare’s first project raised $130,000 and inspired others to start crowdfunding programs. Charities even began utilizing crowdfunding projects and platforms to ask the public to back goal-oriented campaigns.

Michael Sullivan, an entrepreneur, looking for backers to help support his video-blog, is credited with coining the phrase “crowdfunding” in 2006. Although Sullivan’s project ultimately failed, the term stuck and is now common-place.

What Is Crowdfunding

Crowdfunding, as an enterprise, experiences rapid growth all over the world, with great potential for both investors and individuals or entrepreneurs looking for funding. In simple terms, as already outlined above, crowdfunding is a way of raising funds. Money comes from the general public or a selected group for either a business, an individual, a project, or a campaign. However, many terms describe the process of crowdfunding, and it is not always clear how it and its many subcategories should be understood and defined.

We aim through the following paragraphs to shed some light on these matters, to help both entrepreneurs seeking funding for their ideas and investors or individuals contributing to projects. We aim to answer questions such as these: What is crowdfunding? How does crowdfunding work? And what is it used for?

Also, we will make sure that you understand the basics of the most important crowdfunding models: Debt crowdfunding, Equity crowdfunding, Rewards crowdfunding, and Donation-based crowdfunding.

Crowdfunding is, in current times,  a technology-enabled financial avenue, it’s growth closely tied to the evolution of the internet. The crowdfunding phenomenon covers a wide variety of approaches to raise money (or other means) from the crowd for specific ideas through an open call. The process allows resources seekers to raise funds from a large number of capital givers through online platforms acting as intermediaries instead of raising funds from conventional sources like banks, mutual funds, or business angels.

What crowdfunders (investors or donors) get in return for their support depends on what kind of model the campaign or platform uses. As compensation for their economic risk, supporters receive either a tangible or intangible reward. Tangibles can be interest on loans, shares, or dividends in the business or a finished product). While intangible rewards can be recognition, or the joy of supporting a project you are passionate about, gratitude, vanity mentions, production credits, etc. In the latter case, the funds raised constitute a pure donation.

In the categorization of crowdfunding, a vital difference to operate is between investment crowdfunding and non-investment crowdfunding. This distinction highlights a fundamental difference between crowdfunding where funders act as investors aiming to achieve an economic return and crowdfunding where supporters are either seeking to support a charitable project or receive a non-monetary reward. Thus, based on the rights of funders in the specific project or venture, crowdfunding can be classified into four overall models, as mentioned above. Let’s look at each of them in more detail.

The Four Types Of Crowdfunding

When crowdfunding projects offer supporters investment-type benefits and rewards, there are two kinds of campaigns available to creators. One is debt crowdfunding, and the other is equity crowdfunding. When backers’ receivable do not act as investment-type assets, we again find two variety of campaigns operating- rewards-based crowdfunding and donation crowdfunding projects. Out of all the four types, rewards-based crowdfunding is the most popular one, based on the number of platforms operating this model, the number of projects launched, and total funds raised.

Before proceeding further, we want to share with you the definition that financial and government bodies ascribe to crowdfunding within the EU-US space. These definitions, as well as accompanying regulations, define the way platforms, projects, and processes behave in this niche.

It is essential to note definitions of crowdfunding are often limited, and so far, no comprehensive definition of crowdfunding has garnered universal agreement in the industry. However, three main elements that appear time and again can be identified: 1. A significant number of backers or supporters are involved in the funding (the crowd); 2. An online medium facilitates, operates, and promotes the contact between the providers and the seekers of capital (however, the medium is not responsible for the economic relation between project creators and backers); 3. There is an advertised open call to support the campaign.

The European Commission: “Crowdfunding is an emerging alternative form of financing that connects those who can give, lend or invest money directly with those who need financing for a specific project. It usually refers to public online calls to contribute finance to specific projects.”

The U.S. Securities and Exchange Commission: “Crowdfunding is an evolving method of raising money via the Internet to fund a variety of projects.”

The U.K. Financial Conduct Authority: “Crowdfunding is a way in which people and businesses (including start-ups) can try to raise money from the public to support a business, project, campaign, or individual.”

Donation Crowdfunding In A Nutshell

In the donation crowdfunding model, individuals donate small volumes to meet the broader funding goal of a specific charitable project while receiving no monetary or material gain. Donation-based crowdfunding is for individuals who want to support public initiatives and private needs without receiving any return for their contribution. While large charity organizations have long used the internet as a channel for donations, small organizations have not been able to do so until recently. Usually, the motivations and rewards enjoyed by the backers of such projects are:

  • The satisfaction of supporting a good cause (pure donation)
  • A non-tangible reward, such as a token, recognition or brand promotion (reward donation)
  • A physical asset of much lower cost than the pledged amount, e.g., a t-shirt, a pen, a poster or some other form of memorabilia

At the onset, donation-based crowdfunding was aimed at raising funds for social projects and charitable causes such as development, assistance, and NGOs – for example, in the form of aid to fugitives or extraordinary help during catastrophes.

However, as more and more platforms emerge, donation-based crowdfunding has expanded to include everything from personal charitable projects like help paying for medical treatment or education, assistance in events and aid for athletes or art to all kinds of both reasonable and incredible projects – some belonging to the more weird and shady category. Therefore, to avoid scammers, make sure to research the project, the creator thoroughly, and all credentials involved!

Donation-based crowdfunding is the smallest of the four main types of crowdfunding, and according to data available on the crowdfunding market, donation-based crowdfunding only represents 0.07% of the funds raised within the crowdfunding avenue.

A popular platform for donation-type projects is GoFundMe, launched in 2010. It has since become a leader in the donation-based crowdfunding arena, opening the door for small organizations or individuals in pursuit of funds.

Reward-based Crowdfunding In A Nutshell

Thanks to ArtistShare’s success(mentioned above), more rewards-based crowdfunding platforms were launched, the most prominent of which are Indiegogo(launched in 2008) and Kickstarter (launched in 2009).

In the reward-based model, backers provide monetary pledges in exchange for a non-monetary reward, usually a pre-order of a unique or new product or service still under creation. This process allows companies and entrepreneurs to secure cash flows and launch their product with clients and orders already in the books. To attract backers for a product or service not yet available, a discount on the expected future market price will often be provided, along with rewards exclusive to the campaign. Often, the product or service thus launched through crowdfunding will not be further available on a larger scale, so limited supply and FOMO(fear of missing out) create the urgency needed to push sales.

In addition to the arts (including fine art, comics, dance, design, fashion, film and video, music, photography, creative writing, theater), the platforms host funding campaigns for social causes (animals, community, education, environment, health, politics, religion) and entrepreneurs and small businesses (food, sports, gaming, publishing, technology).

From its launch in 2009 through September 2019, Kickstarter hosted more than 471,000 funding campaigns or projects, of which 37.5 percent were successful. The 175,599 campaigns that succeeded raised a total of $4.71 billion from more than 17.2 million backers. More than 57,000, or 32 percent of the successful campaigns, raised more than $10,000; and about 6,710 projects raised more than $100,000. The project categories with the most successfully funded campaigns on Kickstarter are music and film/video, followed at a distance by art, publishing, games, design, theater. The eight other categories include technology, fashion, food, comics, photography, crafts, journalism, dance. Kickstarter charges a fee of 5 percent of the funds collected in a fully-funded campaign. There is an additional 4% fee for payment processing. Not all projects are funded, of course.

In an all-or-nothing funding model, 37 percent of Kickstarter projects are fully funded based on their stated goals and deadlines, while the majority walk away with nothing. All-or-nothing means that if a project does not reach its stated funding goal within a stated campaign period, the campaign fails, and the backers’ are not charged for any payment—and the platform earns nothing.

Indiegogo supports both all-or-nothing and keep-it-all projects with flexible funding. In the latter, the project may keep all the funds it raises even if the goal is not reached. This comes, in turn, with a more substantial fee owed to the platform. Indiegogo also allows for a mechanic called In-demand, through which already successful crowdfunding projects can keep running the project indefinitely, actively turning it into an ecom store.

One of the most successful, and consequently famous, Kickstarter campaigns was the Pebble smartwatch. A group of entrepreneurs in Palo Alto, CA, created a digital, customizable smartwatch that runs downloadable sports and fitness apps, and connects wirelessly to an iPhone or Android smartphone. The team had a $100,000 funding goal for the campaign spanning April and May 2012. With a pledge of $99 or more, backers could pre-order the Pebble watch, the retail price of which was estimated at $150. Pledges of $220 or more were rewarded with two Pebble watches, etc. The campaign raised a whopping $10,266,845 from 68,929 backers(average pledge $149).Another phenomenally successful crowdfunding campaign has been the Coolest Cooler, which raised $13,285,000 from 62,000 backers on Kickstarter in 2014. The company’s funding goal was $50,000.

Many backers pledge amounts less than the minimum required to get a reward. For this purpose, most campaigns include a ‘gratitude’ pledge level, usually $1-$10.  In other words, rather than expecting a tangible reward, they simply want to support the project team and/or their ideas.

To run a successful crowdfunding campaign, “you don’t want to sell people a product merely, you want to sell them a dream,” says one successful Kickstarter campaigner. New rewards-based crowdfunding sites are emerging that focus on a narrow product category or niche market. Experiment.com (formerly called Microryza), for example, is a crowdfunding site for scientific research projects; funders receive rewards stated as “insight behind the science.” Teespring is a Kickstarter-inspired site for designers of custom t-shirts. Plum Alley is a rewards-based crowdfunding site for women entrepreneurs.

A significant fact is that all campaign creators, in the scenario of reward-based crowdfunding, retain their intellectual property rights: patents, trademarks, and copyrights. In other words, the platform is not a producer or publisher or marketer, but a sophisticated mediator that connects entrepreneurs with backers and allows them to interact among themselves, to evaluate the benefits and prospects of the campaign. Backers assume risks. One of the best benefits crowdfunding gives entrepreneurs is the mitigation of potential risks generated by significant investments.  Even when projects are fully funded, there is no guarantee that the entrepreneurs will fulfill their promises to backers, or do so on time.

Two prominent studies found that at least 70 percent of projects miss their delivery deadlines. The platform does not mediate or intervene when funded businesses fail to keep their commitments. Legally a crowdfunding project does not result in substantial obligations perse.  You might expect that giving hundreds of thousands of dollars to a bunch of startups in exchange for promises of products that haven’t yet been marketed would result in a high incidence of fraud. The fraud rate appears to be quite low so far, however. Although 70% of campaigns miss deadlines, they do deliver their rewards eventually.  Ethan Mollick, assistant professor of management at the Wharton School, University of Pennsylvania, concluded in a 2013 study of 48,500 Kickstarter projects that “less than 1 percent of the funds in crowdfunding projects in technology and product design go to projects that seem to have little intention of delivering their results.” Keep in mind that Mollick studied only one kind of fraud—”take the money and run”—and there are other kinds, such as making false or misleading statements in a campaign. It is belived that the low rate of fraud (at least this particular type of fraud) is a result of “the influence of the community,” by which he means the ability of backers and prospective backers to interact with each other and with the campaigner, via questions, comments, and responses on the crowdfunding campaign’s discussion forum, and in particular “discuss the merits and probability of success of each project.”

The continuous presence of the crowd and its highly social nature serve as a kind of screen or deterrent against possible abuses. Anyone considering contributing or investing a significant amount of money in a crowdfunding campaign should always do their due diligence.

Equity Crowdfunding In A Nutshell

 Equity crowdfunding is formally defined as the sale of stake in a business to several investors in return for financing. The idea is similar to how common stock is bought or sold on a stock exchange, or to venture capital. The difference, of course, lies in the platform on which the sale takes place, the regulation overseeing the process, and the lower barrier of entry for both companies seeking funding and investors.

Equity crowdfunding is possible because, in April of 2012, President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. Also known as “the crowdfunding bill,” the JOBS Act aimed to lessen regulatory burdens on small businesses and legalized equity crowdfunding. It includes removing the ban on general solicitation that prevents entrepreneurs from publicizing that they’re raising money.

Before the JOBS Act, equity crowdfunding existed in pseudo-form, complying with regulation D. Given the success of donation and reward-based crowdfunding, it was inevitable that mediators in the funds raising business would try to accomplish similar objectives—matching startups with angel investors using the potential of the Internet, disclosing information and deal terms, and facilitating the investment activity—all online. It is a streamlined process compared with the old version. It usually took eight to twelve months for an entrepreneur to find supporters who were interested in the offer and to negotiate a deal. In contrast, the time was now reduced to weeks or days (sometimes hours) on equity offering platforms. The first Regulation D equity offering platforms, which emerged around 2011, were governed by Regulation D of the Securities Act of 1933. Among the most prominent and successful of those early Reg D platforms (which operate under the Rule 506 exemption of Regulation D) are MicroVentures, launched in 2011 focusing on technology companies, and CircleUp, launched in 2012, focusing on consumer products and retail. Reg D platforms allow issuers to raise an unlimited amount of capital in each offering. But issuers can sell equity through Reg D platforms only to accredited investors, not to “the crowd.” Thus equity projects operating under Regulation D are only pseudo-crowdfunding campaigns.

The JOBS Act established a new kind of angel investing under Title III of the Act. Title III crowdfunding portals(and broker-dealers that offer private securities under Title III) are open to participation by non-accredited as well as accredited investors. This can transform private capital markets because it allows tens of millions of potential backers to participate where only 8 million or so investors could previously participate. From a regulatory point of view, Title III crowdfunding portals are only distantly related to Regulation D Platforms. From a technology point of view, they are siblings: Most Title III portals are derived directly from Reg D platform infrastructure. (From here on, references to crowdfunding portals are meant to include broker-dealer platforms that feature Title III offerings.) Title III amended the Securities Act of 1933 and added section 4(a)(6)to the Act. Some lawyers and regulators may refer to equity crowdfunding as Section 4(a)(6) crowdfunding, but (partly because that’s hard to remember) most people call it Title III crowdfunding or simply equity crowdfunding. Most equity crowdfunding portals opened their gates to the public in April 2016.

Two niches which benefited most from the opportunities equity crowdfunding provides are startups and real-estate. It is, however, important to keep in mind that equity crowdfunding represents a high risk – high reward model, so know that the risks involved are usually considerable.

If you are looking to invest in startups and early-stage businesses but do not have the capital to act as a business angel or have access to venture capital, startup equity crowdfunding can be an exciting opportunity.

Startup equity crowdfunding is the online means of trading your funds with early-stage companies for shares representing a percentage of ownership in the business. A shareholder with partial ownership has the right to profits that might arise if the company succeeds with its business plan. On the other hand, if the company fails, the shareholder will lose some or all of the investment.

Just like the stock market is open for anyone, if they can afford the price of one stock, crowd investing platforms are opening the markets for companies that are not yet ready for a public offering – those starting up.

Equity crowdfunding is encouraging to democratize both the process of funding capital and the investment market. Entrepreneurs benefit by gaining access to a large pool of potential investors – “the crowd”. At the same time, for both individuals and investment companies or funds, benefit when the door opens to a large pool of potential projects and ways to invest in startup equity.

Real estate crowdfunding is a way for property developers and landlords to raise money. They offer equity in a real estate project or property to a large pool of investors that each contributes with a small percentage of needed funds – instead of a few investors with huge amounts. The critical difference between traditional real estate funding and real estate equity crowdfunding is that crowdfunding is done online with the platform used to facilitate the transactions.

Along with the crowdfunding platform, real estate developers use social media platforms such as Facebook, Instagram, or Twitter to market and advertise their projects directly to a much larger audience of potential investors. Thus a community of potential and actual backers forms around the project, further supporting its marketing to the final clients. The social effect increases the momentum and the advertising reach and impact of the property thus developed.

Many investors have taken advantage of real estate equity crowdfunding as an alternative method to buy in real estate deals that would not be available without an online platform. Likewise, developers looking to receive funding are benefiting from the many relationships with smaller investors by getting funding faster, saving time, and gaining access to valuable feedback from the online community.

Debt Crowdfunding In A Nutshell

Debt-based crowdfunding—also known as peer-to-peer lending (or simply P2P) and, more recently, “marketplace lending”—has taken up some of the empty space left when credit availability to SMBs was limited after the 2008-2009 crisis.

Debt-based crowdfunding allows entrepreneurs to acquire money without turning to banks. Entrepreneurs can borrow from a pool of investors to fund their projects, business needs, growth, and expansion ideas and then pay interest when repaying them. The crowd lends money to a company with the understanding that the funds will be repaid-with interest.

Debt-based crowdfunding emerged as an investment vehicle in 2006 in the United States, and a year earlier in the U.K. The debt version of crowdfunding lets individual borrowers apply for unsecured loans (not backed by collateral) and, if accepted by the platform, borrow money from “the crowd,” then pay it back with interest. P2P platforms generate revenue by taking a percentage of the loan amounts (a one-time charge) from the borrower and a loan servicing fee (either a fixed annual fee or a one-time rate of the loan amount) from investors. The application process is free for borrowers. Investors earn interest on each loan (or package of similar loans), assuming the borrowers make timely payments.

From the borrower’s point of view, getting a P2P loan can be simpler, quicker, and cheaper than borrowing from a bank. It is cheaper (that is, fixed interest rates are generally lower) because most of the P2P platform’s services (application review and verification, credit check, loan disbursement, payment processing, collection, compliance, and reporting, etc.) are automated. This results in lower overhead. Only a small percentage of applications are approved. For example, LendingClub (launched in 2006 in San Francisco), the largest P2P platform in the world in terms of issued loan volume and revenue, has an approval rate of about 10 percent. Interest rates are high enough to generate strong returns for investors (assuming sufficient diversification of their loan portfolios)—potentially better returns than traditional money markets and bonds, with less volatility than stocks—and a fairly reliable monthly cash flow of interest and principal payments throughout the term of the loan. In October 2013, Lending Club was charging borrowers a rate of 24.44percent for its riskiest loans, sliding down to 7.65 percent for its least risky ones.

From the investor’s point of view, although the minimum investment can be as low as $25, P2P platforms are more complex than rewards-based platforms because they involve securities regulated by the SEC. Unlike using a rewards-based platform like Kickstarter or Indiegogo, you’ll need to spend quite a bit of time learning how the P2P system works. You’ll need to know the possible risks and returns are for each particular lending opportunity, and what kinds of secondary markets exist before you commit your money to a single borrower or a package of loans. (P2P investors do not have to be accredited.)

Each borrower whose application is approved on a P2P platform receives a credit-risk score and interest rate set uniquely by that platform, acting as an intermediary between borrower and investor. Higher risks must yield higher rates to stay attractive, of course. Investors can select individual creditworthy borrowers based on their risk/rate profiles, in addition to other characteristics such as reason for the loan (debt consolidation, home improvement, major purchase, car finance, healthcare expense, small business expense, vacation, etc.). Mostly the review process, information disclosed, and the model’s architecture favor P2P business lending. The usual interest rate with P2P business lending is 11-13%. Alternatively, investors may choose a combination of dozens, hundreds, or even thousands of investments in the same risk/rate sector, which provides diversification among many borrowers. In all circumstances, the risk for investors is that one or more borrowers will default. In this event, the investor may lose some or all of their funds. P2P business crowdfunding lending is, in most cases, backed by collateral, usually material in the form of a mortgage on real-estate property.

P2P consumer lending is also known as marketplace consumer lending and consumer crowdlending. This type of debt-based crowdfunding is identified by individuals or investor companies providing loans with consumption as purpose to an individual, final consumer (as opposed to a legal entity such as a business, a non-governmental organization, or a public organization).

P2P consumer lending provides financing for personal and household purposes and usually involves unsecured loans that do not require the borrower to put up any collateral. However, some crowdfunded loans are guaranteed with insurance like the case for a car or other valuable tangible assets.

The loans granted in P2P consumer lending cover a wide range of lending classes, such as pay-day loans, wedding loans, travel loans, student loans, car loans, and refinancing. The loans are usually only covered by a personal guarantee and will typically have a wide range of interest rates, depending on purpose, compared to 100% collateral backed loans. Pay-day loans are often the most expensive type of credit with the highest interest rates (as they carry the highest risk). In some instances, car or home loans can be relatively cheap with low-interest rates and low risk, since the purpose comprises a substantial asset.

In general, lending money to consumption can be a precarious affair, especially if you are giving money to someone who is going to use it on something that is not a tangible asset. It is impossible to sell a family’s vacation from one year ago or other already consumed intangible “assets.”

Compared to P2P business lending that generally relies on the assets of a business to generate income, P2P consumer lending is dependent on a single person or family’s household income. As with other types of crowdfunding, the project’s backers carry most of the risk.

Major Crowdfunding Platforms

Although already noted above, here are a couple of platforms for each type of crowdfunding model mentioned.

Donation Crowdfunding Platforms

Rewards-based Crowdfunding

Equity Crowdfunding

Debt Crowdfunding

How Crowdfunding Works – Process Overview

The Ingredients Of A Successful Campaign

It’s now time to talk about the ingredients of a successful crowdfunding campaign.

The first ingredient of a successful project is The Idea behind it. Not every idea is suited for crowdfunding. As outlined when discussing the types of crowdfunding campaigns above, ideas which fall in line with the purpose of each model should be sought after. That is to say, ideas which create tangible and attractive products or services, thus suited for rewards-based crowdfunding. Ideas that have an impact and really stand a chance to make a better world for donation crowdfunding. For equity crowdfunding, valuable ideas represent business strategies and visions with potential for growth, profit, and contribution. And finally, for P2P lending crowdfunding, ideas are valued again on their potential for revenue, growth, contribution, and sustainability.

But an idea is only as good as it’s execution. So, the second ingredient of a successful campaign is a Developed Product Or Service. The product or service should be the result of a masterfully executed action plan, which includes development, prototypic, testing, feedback, and improvements. A strategic business plan should be backed up with your strengths and passions as well as extensive research and data, proving how achievable and the goals forecasted and what is the risk of investment. Social projects should clearly show an action plan to bring the idea to the community, a way to track and measure progress as well as the projected improvements in the quality of life that they will create.

There is a false belief that people with great ideas sometimes have, stemming from well-deserved confidence in the said idea and the resulted product, service, or impact. The idea of ‘If you build it, they will come.’ Which, unfortunately, is false. The key component of great execution is marketing, and, more often than not, marketing decides the fate of the entire project. So, the third ingredient for successful crowdfunding is the vital first step of marketing – Choosing The Right Audience. The right audience is one that loves your product, service, community project, business plan, etc. and wants to spend money on it even before it becomes available on the market or is fully existent in reality. The audience will be unique to your project, so never limit yourself to how others have done it before. Get creative and think like someone who would desire what you’re offering: where will they hang out? Where will they gather? What are they looking for? How do they want to consume content? Where will they converse? Get in on those conversations, make an impact, and capture them as your own. A crowdfunding campaign is just that – funding from the crowd. Your primary job as a campaigner is to find, excite, and activate a crowd for your project. Build a feeling of a warm relationship with your audience. When people feel connected to real persons behind a crowdfunding project, they’ll be more likely to contribute to the campaign.

The next step is to convert the audience into A Community Of Supportive Backers. It means going beyond engaging in conversations because an audience that is communicative on social media or other platforms does not necessarily translate into backers who support the project. This is still the job of marketing – activating the connection you have already built with the audience and turning their desire into demand for your product, service, social project, situation, business, etc.

Next, every successful crowdfunding campaign must have an excellent Project Launch. A great project launch builds upon all the assets presented before and generated by the activity of your pre-launch marketing campaign. A great start is successful in activating the assets and extracting value – in this case, pledges and support for your crowdfunding campaign. Having a strong start to your campaign effectively ensures your chances of funding and reaching your objectives because it creates momentum, positive belief, and powerful action. Momentum, positive crowd feeling and outlook and powerful action create a self-reinforcing circular process which produces better and better results with each iteration as is passes through these stages.

Things don’t stop with a successful launch. The next ingredient is Running The Campaign. For the duration of the campaign, project creators must keep the momentum going; otherwise, the project will stagnate or, even worse, die out. Running the campaign continues the suite of operations executed by creators (whether individuals or companies) in the pre-launch and launch stages. It relates to the same self-reinforcing circular process mentioned in the paragraph above.

Finally, when a project completes successfully, creators have to manage the post-campaign situation. Which generally relates to the usage of funds in accordance with how it was presented during the crowdfunding campaign and achieving the results promised or anticipated. This creates trust and even more involvement from the community, ensuring stability and opportunities for future growth.

Benefits of Running Crowdfunding Campaigns

As it is clear from the outline above, running a crowdfunding project is a complex task. But the high effort required to complete such a project successfully is offset by two factors. Because the popularity and involvement in crowdfunding grew exponentially worldwide within the last 10-15 years, so did the toolkits and knowledge to run campaigns. At this moment, there are a lot of great tools, easily available for crowdfunding creators. They ease operational activity by allowing for easy automatization or delegation. At the same time, they stimulate creativity and resourcefulness. This large body of tools stems from an impressive collection of knowledge, entirely at the disposal of crowdfunding projects creators. This body of knowledge proliferated as crowdfunding gained immense popularity out of the contributions of the same factor, which drives success for the whole thing – the crowd. While other fields grew in knowledge through the limited research of academic professionals, knowledge of crowdfunding resulted from the activity of the crowd with people sharing their experience, both as backers and creators, while others shared expertise.

The second factor, besides the tools and knowledge, is the advantages from which one stands to benefit while running crowdfunding campaigns. Although they are apparent in all we’ve written above, here they are again, in summarized form:

  1. Crowdfunding more efficient than traditional fundraising.
  2. Crowdfunding allows you to tap into a vast marketplace that is rapidly growing every year.
  3. It allows you to attract new customers at a fraction of the cost.
  4. Crowdfunding, through different models, allows businesses to generate more revenue with less risk
  5. The crowdfunding world is a place to build traction, social proof, and validation.
  6. You can create massive economies of scale.
  7. Master a structured and systematic way to build a product, service, business, and launch.
  8. Crowdfunding gets you early adopters and loyal advocates.
  9. Crowdfunding campaigns double as marketing and media exposure.

Avenues For Future Growth

From all that we’ve presented above, it’s clear that crowdfunding does possess a huge potential for growth and, more importantly, global, impactful change. While crowd-based businesses, platforms, and markets do appear to be fairer, they need trust for them to achieve their inherent potential and predicted growth. They will need to ensure that trust levels are high, both in the quality of the fundraiser and in the due diligence, or creditworthiness of the lender.

Any hint of distrust arising in the industry will put a firm brake on growth levels, especially during these early stages, when the legal status of the industry has yet to become fully formed. In all models, there are different levels of risk that usually the crowd has to bare. In some instances, the risk is particularly big and heavy on supporters’ shoulders.

High risk creates the opportunity, in the event of early incidents, for an excessive response in terms of investor protection that may strangle the industry.

We can highlight the hypothesis with the situation that has already played out in China, where the rise of over 1,500 P2P platforms has created a wild west situation, often significantly lacking the trust needed to flourish.

With traditional financial services and avenues scoring even worse on trust issues, however, and rock bottom interest rates prompting investors to look under every stone for good returns, it is inevitable that the crowdfunding opportunities is a market that will continue making waves in the coming years. Thus we can only hope for crowdfunding to thrive, pushing a paradigm shift in business- investor and business-consumer relations, moving things from the impersonal sphere of Adam Smith’s free market to the area of actual, human, social connectivity.