A Basic Understanding of Crowdfunding

Introduction to Crowdfunding

Crowdfunding is the practice of funding a for a business, a project or a charitable cause by raising many small amounts of money from a large number of people, typically on the internet. With the advances of technology and the Internet, crowdfunding has connected millions of new entrepreneurs with financial sponsors worldwide and gained enormous popularity due to its simplicity and accessibility.

According to a PR Newswire report in January of 2023 Crowdfunding is expected to reach more than $28 billion by 2028. One of the main influences driving growth in the Crowdfunding industry is free social media promotion. On average, successful crowdfunding campaigns raise $20,000-40,000 of investment. Statistically, 42% of funds are raised in the first and last three days of a Crowdfunding campaign.

The pros of Crowdfunding include:  

1.     The funds come from many sources.

2.     It is a great way for startups to build a customer base.

3.     It is typically done without credit checks.

4.     It creates a channel for early feedback.  

The cons of Crowdfunding are:

1.     The fees incurred can be high.

2.     Your business idea or plan will be unveiled and may be stolen.

3.     The time required may be extensive.

4.     Federal restrictions on how and how much funding you can raise on some types of Crowdfunding.

Types of Crowdfunding

There are four basic types of crowdfunding: Donation, Rewards, Equity, and Debt.

  1. Donation Crowdfunding - campaigns that collect money with no promise of anything in return (example - GoFundMe).

  2. Rewards-based Crowdfunding -the sponsor sets multiple levels of rewards that correspond with pledged amounts (examples - Kickstarter or Indiegogo)

  3. Equity Crowdfunding - the exchange of interests of a private company in return for capital.

  4. Debt Crowdfunding - the raising of capital in the form of a loan, whether for a personal, small business, or real estate investment.

The first two types of Crowdfunding—Donation Crowdfunding and Rewards Crowdfunding do not fall under securities law and are regulated by the Federal Trade Commission. The latter two types—equity and debt crowdfunding—do fall under securities laws and are regulated by the Securities and Exchange Commission and state-level regulators.

Crowdfunding Platforms

Global companies providing crowdfunding help include Kickstarter, Indiegogo, GoFundMe, Lending Club, Fundable, Patreon, Fundrazr, Campfire, AngelList, GoGetFunding, DonorsChoose, Crowdfunder UK, Crowdfunder, Milaap, RocketHub, Companisto, and Crowdo. The rules of how each platform operates vary and it is best to understand their rules and process before selecting a platform.

Kickstarter is a rewards-based donation platform that has been around since 2009. It has been employed to raise more than $5 billion for more than 182,000 projects.

GoFundMe is a donation-based crowdfunding company. While it is best known for charitable initiatives, businesses can take advantage of the platform as well. One in every ten campaigns is fully funded on the site.

LendingClub is a debt-based crowdfunding site platform. It etends three-to-fiveyear loans from $40,000 in personal loans or up to $500,000 in small business financing.  

Indiegogo is a reward-based platform offering two kinds of funding, fixed or flexible. Fixed funding allows you to set a goal for a targeted amount of money, and if you don’t reach your goal, all funds are returned to donors. Flexible funding is when you are seeking any amount of monetary support, all of which you can keep whether you hit your goal or not.

 Crowdfunding Conclusion

Crowdfunding can be a smart way to raise initial funds for your business, project or charity, especially if you are having a hard time getting approved for traditional funding. Just be sure to pay attention to the crowdfunding platform rules and engage the services of an experienced Crowdfunder, particularly for equity or debt offerings.  It is also essential that you are prepared to invest in marketing up front, otherwise, you will experience limited donations if people don’t know about or understand your fundraising purpose.

Finally, it is important to keep your investors updated every step of the way.

Steve O'Driscoll

With over 25 years of experience in copywriting and marketing strategy, I specialize in creating persuasive, compelling, and action-driven content that resonates with target audiences. For the past 14+ years, I’ve worked as a freelance copywriter following full-time roles at major corporations and marketing agencies. This journey has allowed me to collaborate with corporate clients, design studios, and startups around the globe—helping to develop and launch impactful B2B and B2C marketing campaigns.

https://steveomarketing.com
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