What Is Crowdfunding? (Updated for 2022)

It's every entrepreneur's dream to come up with that million-dollar idea that catapults them to stardom. But, even if they do, in most cases, this idea is unfeasible due to a lack of funds and initial capital. What do the Oculus Rift VR headset, The Coolest Cooler, and Fidget Cube all have in common? Answer: They were all crowdfunded companies that raised anywhere between $250,000 to $15 million.

This article will explore what crowdfunding is, why it's useful, and share our top crowdfunding tips that you can use to kick-start your new business.

What Is Crowdfunding?

Crowdfunding is the process of raising awareness about a new product that you’re considering developing and then acquiring small contributions from a lot of interested parties, who are in most cases just average members of the public. Common platforms for launching a crowdfunding campaign include Indiegogo and Kickstarter. 

How Does Crowdfunding Work?

Let’s consider a social entrepreneur example. Imagine you've developed an environmentally friendly hairspray that isn't tested on animals and doesn't damage the atmosphere. These are the steps you would need to take:

1. Develop a prototype.

2. Raise awareness on social media.

3. Join a crowdfunding platform.

4. Have investors/individuals pay a specified amount of money, and when the required total funds are reached, send investors the product.

5. If the required capital goal is not met, return investor's money through the crowdfunding platform.

Crowdfunding flips the conventional business financing model on its head. Instead of sourcing capital from a bank or a few investors and then marketing it to the public, you are putting the product directly in the public’s hands. If they like your idea and campaign, they will invest. If not, they simply won’t be provided with your product. 

The 4 types of Crowdfunding

The model mentioned above is the most common type of crowdfunding, but you do have a few more options at your disposal:

1. Reward crowdfunding – in this model, instead of receiving a full product, especially if the donation is small, investors will receive an incentive which can be a gift, an invitation to a launch party, or any other predetermined reward. 

2. Donation crowdfunding – this is similar to reward funding in the sense that it relies on donations more than investment. But, as charities often do these types of crowdfunded campaigns, there is no reward. The incentive here is to form and mobilize a community to tackle an ethical problem or common cause.

3. Lending-based or debt crowdfunding – in this technique, as the name implies, you are only borrowing money for a certain period and then returning it with interest. Let's say you're an entrepreneur who is developing a digital flipbook maker, and the bank has denied your loan requests. Using debt crowdfunding is incredibly useful as it allows you to borrow from multiple investors instead of just one.  

4. Equity crowdfunding – this is a simplified version of the stock market. Many investors chip in until the capital is reached, and in return, they receive some equity or a cut of your future profits. They are essentially becoming partners in your business.

What Are the Advantages of Crowdfunding?

Social media is one of the most valuable and readily available marketing tools in business. Crowdfunding is made possible due to the pervasive nature of social platforms and their shareability. This means that if people like your product, there is a huge possibility that it will gain traction.

Social media popularity can be worth more than you think. Let's say that you had initially contacted investors, but they had declined your offer due to your unrealistic goals for sales reps. If you begin to crowdfund your project and it gains mass appeal, investors are more likely to change their minds and reconsider giving you the capital.

Another advantage is that there is no limit to how much you set as the minimum donation or the maximum funds needed. This means that you can raise the minimum contribution to the product's price and then gift the product to the investor.

Fundraising, meeting with investors, and following up with leads can be very tiresome. Crowdfunding is all done online and on one platform so that you can focus your efforts on one channel. Not only that, but it's risk-free. If people don't like your idea, they won't invest, and if you don't get your money, you don't have to provide the product.

The Most Crucial Tip for Crowdfunding

The key to successful crowdfunding, aside from an excellent product, is marketing. Although marketing quotes can often be clichéd, Tom Fishburne’s idea that "the best marketing doesn't feel like marketing" is inherently accurate. Your campaign needs to tell a story. 

Your main advantage over other corporations is that you have a direct connection to the public. Use all the available social media platforms, digital assets such as videos and infographics, and marketing channels like email to sell yourself and your product. 

In Conclusion

Crowdfunding is a low-risk, high-reward method of acquiring capital for a start-up. If you use all the available tools to create a compelling marketing campaign that resonates with people, there is no reason why you can't join the likes of Oculus Rift with a very successful business proposition.