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Frequently Asked Questions:

What is Crowdfunding?

Crowdfunding is the practice of raising small amounts of capital for a cause, project, or business venture from a large group of people. It can be as simple as gathering contributions from family, friends, and acquaintances, but most entrepreneurs choose to launch campaigns on social media or on crowdfunding platforms in order to access a wider network of potential backers.

Why Run a Crowdfunding Campaign?

Crowdfunding has several advantages over the traditional approach of pitching to investors. It is comparatively easy to implement, bears a lower risk, and can have a far-reaching impact.

Crowdfunding allows you present your product or service in a streamlined format (typically a webpage) that is accessible to all. Crowdfunding platforms such as Kickstarter or Indiegogo are popular because they allow businesses to publish information about the project, post updates, engage with potential investors or customers on social media, and keep track of financial goals.

The experience of crowdfunding can also help if you require another round of funding down the road and need to turn to other forms of investment, such as venture capital or a bank. A good crowdfunding campaign condenses information so it’s easy for potential backers to understand, which will help you with your business pitch. What’s more, running a crowdfunding campaign gives you the opportunity to collect useful feedback from potential customers and make improvements before you launch. A successful crowdfunding campaign validates your idea and shows market readiness. Should you need more capital down the line, investors may look at your fundraising campaign as proof of concept.

What are the Types of Crowdfunding?

There are four main types of crowdfunding:

1. Rewards-Based Crowdfunding

A rewards-based campaign incentivizes backers with a reward, such as a discounted product or a branded good. Backers usually contribute small amounts (between $1 and $1000), and their rewards can be scaled according to how much they give. For example, a backer who pledges $15 to a book project receives a digital copy, while pledging $30 gets a hardcover copy. This popular form of crowdfunding works best for consumer products and creative projects.

2. Debt-Based Crowdfunding

In debt crowdfunding, backers lend money to the company with the expectation of being repaid the principal plus interest. This model is usually used by companies that are already operational (as opposed to startups) because they have cash flow and can likely shoulder some debt.

3. Equity-based Crowdfunding

In this model, contributors provide larger sums in exchange for part ownership, or equity, in the company. Equity crowdfunding is usually used by companies seeking higher sums (over $50K) in order to fund their launch or support their growth.

4. Donation-Based Crowdfunding

In this type of crowdfunding, contributors make a donation to the campaign with no expectation of a reward or equity. Startups do not typically use this model, as most people prefer donating to a charity or nonprofit organization over a business. Donation-based crowdfunding is largely used to raise money for charitable projects, disaster relief, and political campaigns.