What is Crowdfunding? Clear, Simple Answer Here. (2024)

Crowdfunding at a Glance

Crowdfunding is a method of raising capital through the collective effort of friends, family, customers, and individual investors. This approach taps into the collective efforts of a large pool of individuals—primarily online via social media and crowdfunding platforms—and leverages their networks for greater reach and exposure.

How is Crowdfunding Different?

Crowdfunding is essentially the opposite of the mainstream approach to business finance. Traditionally, if you want to raise capital to start a business or launch a new product, you would need to pack up your business plan, market research, and prototypes, and then shop your idea around to a limited pool or wealthy individuals or institutions. These funding sources included banks, angel investors, and venture capital firms, really limiting your options to a few key players. You can think of this fundraising approach as a funnel, with you and your pitch at the wide end and your audience of investors at the closed end. Fail to point that funnel at the right investor or firm at the right time, and that’s your time and money lost.

Crowdfunding platforms, on the other hand, turns that funnel on-end. By giving you, the entrepreneur, a single platform to build, showcase, and share your pitch resources, this approach dramatically streamlines the traditional model. Traditionally, you’d spend months sifting through your personal network, vetting potential investors, and spending your own time and money to get in front of them. With crowdfunding, it’s much easier for you to get your opportunity in front of more interested parties and give them more ways to help grow your business, from investing thousands in exchange for equity to contributing $20 in exchange for a first-run product or other reward.

The Benefits of Crowdfunding

From tapping into a wider investor pool to enjoying more flexible fundraising options, there are a number of benefits to crowdfunding over traditional methods. Here are just a few of the many possible advantages, which we’ll cover in greater detail later in this guide:

  • Reach – By using a crowdfunding platform like Fundable, you have access to thousands of accredited investors who can see, interact with, and share your fundraising campaign.

  • Presentation – By creating a crowdfunding campaign, you go through the invaluable process of looking at your business from the top level—its history, traction, offerings, addressable market, value proposition, and more—and boiling it down into a polished, easily digestible package.

  • PR & Marketing – From launch to close, you can share and promote your campaign through social media, email newsletters, and other online marketing tactics. As you and other media outlets cover the progress of your fundraise, you can double down by steering traffic to your website and other company resources.

  • Validation of Concept – Presenting your concept or business to the masses affords an excellent opportunity to validate and refine your offering. As potential investors begin to express interest and ask questions, you’ll quickly see if there’s something missing that would make them more likely to buy in.

  • Efficiency – One of the best things about online crowdfunding is its ability to centralize and streamline your fundraising efforts. By building a single, comprehensive profile to which you can funnel all your prospects and potential investors, you eliminate the need to pursue each of them individually. So instead of duplicating efforts by printing documents, compiling binders, and manually updating each one when there’s an update, you can present everything online in a much more accessible format, leaving you with more time to run your business instead of fundraising.

Types of Crowdfunding

Just like there are many different kinds of capital round raises for businesses in all stages of growth, there are a variety of crowdfunding types. Which crowdfunding method you select depends on the type of product or service you offer and your goals for growth. The 3 primary types are donation-based, rewards-based, and equity crowdfunding (this guide will focus mostly on rewards-based and equity).

Donation-Based Crowdfunding

Broadly speaking, you can think of any crowdfunding campaign in which there is no financial return to the investors or contributors as donation-based crowdfunding. Common donation-based crowdfunding initiatives include fundraising for disaster relief, charities, nonprofits, and medical bills.

Rewards-Based Crowdfunding

Rewards-based crowdfunding involves individuals contributing to your business in exchange for a “reward,” typically a form of the product or service your company offers. Even though this method offers backers a reward, it’s still generally considered a subset of donation-based crowdfunding since there is no financial or equity return. This approach is a popular option here on Fundable, as well other popular crowdfunding platforms like Kickstarter and Indiegogo, because it lets business-owners incentivize their contributor without incurring much extra expense or selling ownership stake. Read more about preparing and launching a successful rewards-based campaign here.

Equity-Based Crowdfunding

Unlike the donation-based and rewards-based methods, equity-based crowdfunding allows contributors to become part-owners of your company by trading capital for equity shares. As equity owners, your contributors receive a financial return on their investment and ultimately receive a share of the profits in the form of a dividend or distribution. Read more about preparing and launching a successful equity-based campaign here.

Since we’ll be dealing mostly with rewards-based and equity based crowdfunding in this guide, here’s a quick visual guide to help keep them straight:

Chapter Glossary

Crowdfunding – A method of raising capital through the collective effort of friends, family, customers, and individual investors.

Accredited investor – An individual whose net worth is greater than $1MM, or whose income exceeds $200k for the past 2 years. Currently the U.S. Securities & Exchange Commission (SEC) mandates that only accredited investors are legally able to invest in private companies.

Donation-based crowdfunding – Any crowdfunding campaign in which there is no financial return to the investors or contributors.

Rewards-based crowdfunding – Any crowdfunding campaign that involves individuals contributing to your business in exchange for a “reward,” typically a form of the product or service your company offers.

Equity-based crowdfunding – Any crowdfunding campaign that allows contributors to become part-owners of your company by trading capital for equity shares.

What’s Next:

Following, ‘What is Crowdfunding?’, we’ll take a look at the roots of crowdfunding, dating as far back as the 1700s, and some of the ways the new technology and legislation is transforming the industry.

What is Crowdfunding? Clear, Simple Answer Here. (2024)

FAQs

What is crowdfunding in simple words? ›

Crowdfunding is a way of raising money to finance projects and businesses. It enables fundraisers to collect money from a large number of people via online platforms. Crowdfunding is most often used by startup companies or growing businesses as a way of accessing alternative funds.

Does crowdfunding really work? ›

Crowdfunding also often attracts early adopters who get very excited about the product existing; it can be a great way to find a community of supporters who are invested in your success. These early adopters can provide valuable feedback, promote your brand and remain loyal customers for many years to come.

Does crowdfunding need to be paid back? ›

Do You Pay Back Crowdfunding? For crowdfunding that operates on a donation basis, the company does not need to pay back investors. However many companies offer incentives for early backers such as an advance copy of the product.

What is crowdfunding for kids? ›

Crowdfunding is a fundraising method that helps individuals raise money for any cause through an online donation page. It's great for helping kids fundraise and running fundraisers for child-related causes.

How do you get paid from crowdfunding? ›

Equity investment crowdfunding is a way to source money for a company or project by soliciting many backers, each investing a relatively small amount while typically using an online platform. In return, backers receive equity shares in the company.

Is crowdfunding a good option? ›

If you're launching a new product or service, reward-based crowdfunding might be the best fit. If your business has a strong social or community-oriented mission, donation-based crowdfunding could be a good choice.

What is the downside of crowdfunding? ›

Key Takeaways

Pros of crowdfunding include being able to get money that you don't have to repay or borrowing more than you could using traditional methods. Cons of crowdfunding include the potential of not meeting goals and exposing yourself to the public.

How long does it take to get money from crowdfunding? ›

The maximum time for a project to reach it's funding goal is also variable, from a few hours to a few months. Upon successful raise, the time frame for completing the legal documentation and transferring the funds over to you is up to four weeks.

Can I use crowdfunding to get out of debt? ›

Crowdfunding can be a great way to repay debt for a startup. It can help you raise the funds you need to repay your debts and can also give you a bit of extra money to help you get started.

Do you have to pay taxes on crowdfunding money? ›

Crowdfunding campaigns that gather donations for personal use are generally considered personal gifts and are thus not subject to taxes for the recipient.

Is there a fee for crowdfunding? ›

Most crowdfunding platforms charge a fee for hosting your campaign on their website. These fees typically cover the costs of platform maintenance, customer support, payment processing, and other administrative expenses. Platform fees can vary widely, ranging from around 5% to 8% of the total funds raised.

What is the difference between GoFundMe and crowdfunding? ›

Donation-based crowdfunding

The person running the fundraiser isn't obligated to pay back donors or give them anything else in return for their contributions. GoFundMe is one of the major crowdfunding sites that uses donation-based crowdfunding. Note: GoFundMe only allows donation-based crowdfunding.

What qualifies for crowdfunding? ›

Crowdfunding is a way of raising money to finance projects and businesses through the collective effort of friends, family, customers, individual investors, and others.

How much money does crowdfunding take? ›

Crowdfunding platforms typically charge a fee based on the amount of money raised. This fee varies by platform but generally ranges from: 5% to 10% of the Total Funds Raised: This is the most common fee structure. Additional Payment Processing Fees: These are often around 3% to 5% of the total funds raised.

What are the four types of crowdfunding? ›

Below, we delve into the four primary types of crowdfunding: donation-based, equity-based, rewards-based, and debt-based. Choosing the right one can be critical to your campaign's success.

Is crowdfunding legal in the USA? ›

Anyone can invest in crowdfunding offerings. But, because of the risks involved, the rules limit how much non-accredited investors can invest in these kinds of securities during any 12-month period. Other requirements and procedures are also in place to protect and inform those who invest in crowdfunding offerings.

What is an example of successful crowdfunding? ›

Roam Research. Roam Research is another project that ran one of the major and successful equity crowdfunding campaigns. This is one of the most profitable crowdfunding equity projects that launched its campaign on Wefunder and raised almost $1 mln from 756 investors.

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