What is Crowdfunding?
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).
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 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.
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:
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.
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.
As crowdfunding makes gains in popularity, the battle for pageviews and pledges has become increasingly competitive, especially on portal sites that feature thousands of live projects at once. If you’re depending on a Kickstarter feature to kickstart your campaign, then you could be in trouble.
So how do you ensure that you’ve optimized your campaign for success? We’ve taken a look at a number of recently funded projects in order to identify some of the techniques, strategies, and crowdfunding secrets that will give you the best chance of meeting your goals.
1. Prepare Your Face Off
You can use crowdfunding to help validate ideas before they are fully realized, but if your campaign comes across as half-baked then your audience isn’t going to invest. “People don’t want to back a campaign that’s not going to work,” says writer and entrepreneur Seth Godin on his crowdfunding experiences, and you can’t use crowdfunding as a shortcut to avoid properly fleshing out your ideas.
2. Strategic Social Media
You don’t need a blanket presence on social media, though the wider your reach the better. Pick the networks that best match your marketing and content strategies and where your potential supporters are most likely to be found. Don’t forget to customize your promotion to suit each platform too: indie band Bigtree Bonsai raised $6,956 (almost double their target) via IgnitionDeck after spreading the word with a #letsmakearecord hashtag.
3. Produce a Great Video
Video clips give visitors a better idea of your project — they can see you or your product in action rather than clicking through a series of static images. They are also labor-intensive, so don’t attempt to put together a clip if you don’t have the time, resources and expertise required. An amateur-looking video isn’t going to convince anyone to get involved, and at worst, could damage your campaign’s credibility.
It’s usually well worth paying for help to make your video pitch the best it can be because of the investment it will attract. Seth Godin again, on the campaign he ran that reached its goal in three hours: “There’s something about the medium that makes the video even more important than you’d think.”
4. Create a Helpful Media Page
You’ve no doubt seen some of the most popular crowdfunding projects covered in the press, but this won’t happen if you don’t have a solid website and some press materials that journalists can download. Even if you’re a one-man show, don’t rely on your Facebook page to do it all. If journalists can’t find more information about your project and some high-resolution pictures to illustrate their features, they may choose to promote a different project instead.
If you have grander plans, think press releases and even tours: the Star Citizen video game raised over $14 million through IgnitionDeck’s WordPress plugin, and the campaign included a press tour before the crowdfunding element was even launched.
5. Don’t Ask for Money Immediately
Tell your story and share your enthusiasm for your project, and people will naturally want to add their support. Remember that your supporters are giving you money with the expectation of getting something back: they want to receive a return on their investment, whether it’s a physical product or an emergency relief operation that swings into action. Consider how well the IgnitionDeck-powered campaign for The Public Domain Review worked — it shows the benefits and value of the publication up front, so backers know what it is they’re supporting. What’s more, supporters could pledge as little or as much as they liked.
6. Build Interest Before You Close
Even before you launch a crowdfunding campaign, you can drum up interest in your project or your business. With a solid fanbase in place, your campaign will get off to a good start. For example, Adam Baker leveraged the active following on his Man Vs. Debt blog to help his I’m Fine, Thanks documentary reach its goal with over 4,000 backers. If you don’t already have a community to tap into, try and get the attention of a handful of influential figures who might be interested in your project.
7. Communicate Often
Whether it’s good news or bad, keep your backers and potential backers in the loop. Post regular updates on your crowdfunding page, and keep the process going after the campaign has ended: “The real work begins after the campaigns to ensure everyone gets what they pledged,” says Piwik’s Matthieu Aubry, who successfully funded a new feature through IgnitionDeck.
8. Keep It Personal
Introduce your team to let your supporters meet the people behind your project regardless of whether you’re an established company or an up-and-coming startup. Consider the humor and personality in the crowdfunding campaign A House For Lions ran to fund their debut album using IgnitionDeck. Rewards included surfing lessons from the band and input on the track listing.
9. Appeal to Your Existing Fans
The campaign that earned the Veronica Mars sitcom a shot at the big screen paid particular attention to the show’s existing fans. The campaign didn’t do a great deal to draw in new interest, but was very clever about appealing to people who had already formed an attachment to Veronica Mars. Consider the fans and supporters that you already have, making your project goals and rewards something that these people are going to be ready to identify with.
10. Appeal to Everyone Else
You can create a campaign that has broad appeal at the same time as paying special attention to your existing supporters. One of the best ways to do this is by creating a reward scheme with many different price points. Even if you can’t offer a physical reward for a $1 donation, you could still give these pledgers early access to your product or a credit within your software package, for example. The Back To The Roots AquaFarm raised $248,873 after setting a $100,000 goal, with rewards ranging from $1 (for behind-the-scenes updates) to $10,000 (for an educational seminar in your community).
There’s no way of guaranteeing crowdfunding success, but by studying the projects, strategies, and crowdfunding secrets that have worked for others, you can certainly maximize your chances. Like any other business venture, crowdfunding is an iterative process that start long before the doors are opened, and long after the campaign has closed.
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Where are the Professional Crowdfunding Campaign Managers and Consultants?
There are many freelancers, consultants, and agencies that offer PR, SEO, and web design services online, so you might think it would be equally easy to hire someone to help run your crowdfunding campaign. Doing a simple Google search on the topic shows that many others have the same question, and that there is no easy answer . Some of the confusion may stem from understanding what exactly crowdfunding consultants do and why you should hire them. We’ve talked to crowdfunders and some professional crowdfunding consultants and campaign managers to find out why the concept of hiring one is still relatively unknown. Here’s what’s going on:
“One of the biggest problems is that we talk about crowdfunding as if it is one animal, but the consulting and support that a campaign needs is widely different depending on the type of crowdfunding, the funding goal, and type of business. As a consultant, I specialize in rewards crowdfunding, and even among rewards campaigns, the approaches to effective marketing are different for different niches. What will work for a tech start-up is completely different from what will work for a local craft brewery.
But the biggest barrier is that most of the population doesn’t really know what crowdfunding is. We live in our crowdfunding silos thinking that everybody knows crowdfunding, but outside the tech, gaming, and film genres, most people have no firsthand knowledge of crowdfunding. I know because these are my clients. In particular, small businesses and the PR & marketing experts, accountants, and lawyers that support them are really at a loss as to how this new funding tool works. Why does this matter? Because the best source for a credible and experienced consultant is word-of-mouth. And there just aren’t enough mouths in the greater ecosystem that understand crowdfunding to make these referrals.”
Most people who have successfully run a crowdfunding campaign are now managing the company or project they originally raised money for. Successful crowdfunders are often successful because of the gifts, signups and products that they promise to their backers. Once the crowdfunding campaign ends, successful crowdfunders are busy producing products, fulfilling campaign promises and generating new business to maintain momentum now that the product has successfully launched.
Customers can be very frustrating as they are very emotionally invested in their projects and have little marketing experience and unreasonable expectations. Try as one may, it’s not possible for even the most successful of crowdfunding agencies to predict the success of a campaign. But that won’t stop a customer from demanding a guarantee. Entrepreneurs have spent many hours building and growing a product and perhaps their last few dollars on a successful crowdfunding campaign. Given that they are banking on everything to work, they will naturally be very demanding and emotional and perhaps expect a huge return on their crowdfunding campaign.
Entrepreneurs should be doing it themselves . If you’re an entrepreneur you have to run every part of your business, sales, customer service, product development, you name it, until you can find someone to do it for you. Some would say that rule also applies to crowdfunding campaigns. Crowdfunding was created to allow individuals, rather than companies, to reach the masses. One might argue that if an entrepreneur can’t reach his audience they may not have what it takes to run the project.
“Unfortunately most folks thinking about crowdfunding or starting a campaign are bombarded by chancers who add no real value and most do it from the standpoint of being “marketing experts” who offer guaranteed PR or to “run your campaign for a success fee”. to accept these offers is the biggest mistake a crowdfunder can make. The reasons are various but here are a few: If you believe that crowdfunding is just a marketing exercise then you are missing most of its value. Secondly authenticity is the key currency in a CF environment and third parties cannot bring that. Thirdly crowdfunding is incredibly hard work and a 24/7 exercise – you will not get that sort of input for a success fee. Fourthly – would you hire someone to go and speak to the bank, angel or VC group on your behalf and expect to get a positive result?”
– Tim Wright Director at Twintangibles
It makes sense to bring in help with the day to day work of working on the crowdfunding platform, managing social media, sending out PR communications, answering questions, and all the other work that goes into running a crowdfunding campaign. But if it’s your product, your baby, your project, your passion, your dream, that you’re selling, it should be your face on the video, and your personal voice showing through in all communications. Crowdfunding is very personal. People go to Amazon.com to buy a product, they go to Kickstarter to participate in a dream.
General online marketing and PR skills more important than specific Crowdfunding experience. When it comes to the most successful crowdfunding campaigns , they all had a common ingredient. Each campaign went viral, well beyond their intended audience and reach. The elements of a viral campaign include engaging content, videos and a story that captivates prospective funders that come across your campaign. Online marketers and PR professionals could easily help with this. Is creating content for a crowdfunding campaign any different than any other form of online marketing or advertising? Many traditional PR and Marketing agencies are starting to add crowdfunding specific services to their offerings.
Existing providers are viewed as scams. There are quite a few stories on review sites of crowdfunding campaigns gone wrong. Maybe an individual purchased a DIY crowdfunding package from a site and is disappointed at the results or hired a crowdfunding consultant and shelled out a lot of money only to not meet the desired result. Though most crowdfunding consultants and agencies don’t make any promises, customers expect the campaign to deliver the desired result or else. These reviews and scams have decreased confidence in what is a very new and unexplored field, which will in turn discourage others from taking a chance on a crowdfunding consultant.
Industry is not old enough. PR has been around since Mad Men era, and the Internet is celebrating its quarter life crisis this year. Professionals in the PR, online marketing and SEO industries have had plenty of time to develop their expertise and thus have earned the rights to claim they are experts. Not so for crowdfunding, a relatively new phenomenon. The oldest and most popular crowdfunding platforms aren’t even 10 years old yet. Even if a consultant started their business simultaneous with the launch of the first crowdfunding platform in 2007, they’d have less than 10 years of experience. Someone with less than 10 years of experience in anything can hardly call themselves an expert.
And with that said it turns out that quite a few crowdfunding consultants do exist in various shapes and forms, some that have been established for some time. Most successful crowdfunding consultants and agencies have a background in marketing and PR and crowdfunding is an extension of the services they already provide. Here are a few different types of crowdfunding consultants:
- The Guru – The guru is an experienced crowdfunder that teaches you how to run your own successful crowdfunding campaign. They believe you should do the actual crowdfunding yourself, but teach you and equip you with all the tools necessary to turn your cause into a successful crowdfunded project.
- The Campaign Manager – The campaign manager works with you to manage various parts of your campaign whether social media or drafting campaign documentation. You hire them as part of your team.
- The Agency – The agency offers a more comprehensive set of services offering management of everything from social media and campaign set-up to videography and fulfilling requests. Individuals who hire agencies often do not have a team, the agency is their team.
And along with these types of crowdfunders, some entrepreneurs find themselves hiring videographics, graphic designers and wordsmiths to help in crafting specific parts of their campaign.
CrowdExpert.com talked to a couple crowdfunding consultants to learn their thoughts on the industry and why crowdfunding managers and services aren’t more popular and widely used in the crowdfunding space.
Rose Spinelli operates The CrowdFundamentals and is a crowdfunding consultant with roots in journalism and storytelling. Rose draws on this experience to teach individuals how to launch successful crowdfunding campaigns. Rose agrees that there aren’t more successful crowdfunding campaign managers and services because “entrepreneurs should be doing the work themselves” and also “crowdfunding is young.”
Alexandria Embleton works at a crowdfunding agency by day and is an independent campaign manager as well. She sees how all the reasons listed above factor into why crowdfunding campaign managers and services aren’t more popular. She believes that “a crowdfunding campaign requires 24/7 attention.”
While some crowdfunding consultants see themselves as campaign guides, others see themselves as hands-on managers. Rose adopts the former approach. She states “Crowdfunding is about you and your crowd. It would be best if entrepreneurs do as much of the relational work themselves. It becom es a problem when someone is your mouthpiece, when a third party manages your campaign.” Rose employs a mentoring approach, giving campaign managers the tools they need to build their brand and convey an engaging message. It becomes a problem when someone is your mouthpiece, when a third party manages your campaign.” Rose employs a mentoring approach, giving campaign managers the tools they need to build their brand and convey an engaging message.
Alexandria believes that successful campaigns have an engaged audience which is why she says, “I do not recommend launching a campaign at all if at least 500 do not already know about it before it begins.” Alexandria elaborates that “A campaign’s success is contingent on eager followers, first movers and audiences that respond to digital campaigns and social media…The first 48 hours will determine success or failure.”
Keeping these philosophies in mind, it’s important to have questions and ideas prepared beforehand when you meet a crowdfunding consultant. Crowdfunding campaigns are often very personal born from an entrepreneur’s need or personal experience. It’s imperative to work with a consultant that shares your passion, philosophy and approach to working on your project. The following are a few questions that should ask:
- Philosophy . What is the crowdfunding consultant’s philosophy and criteria? Do they believe “entrepreneurs should do it themselves.” If so, they’re not the person to ask to manage your campaign. Do they have certain requirements of aspiring crowdfunders before they engage in a campaign? If so, do you meet those requirements? Before contacting a potential crowdfunder, get to know them and their philosophy about crowdfunding on their website, blog and social media. Keep this in mind when soliciting help and ask if they provide the type of help you seek.
- Approach . If you and your crowdfunding consultant are on the same page, next find out their approach. Are you paying for a simple online course? Are you able to contact them for advice via email? Will they be scheduling tweets and writing copy for your campaign or simply telling you how to do so? Create clear expectations and outline roles before paying for a contract to avoid disappointment.
- Successful Campaigns. A successful crowdfunding consultant should be able to tell you about past successful campaigns. If you are hiring them to be your guru, ask about a previous client they’ve coached to success. If they are managing your campaign, ask about numbers and metrics for a campaign they’d consider successful.
Finally, if you are hiring or interviewing a crowdfunding consultant, manager or service, here are a few red flags to watch out for:
- Lack of questions. So you’ve gone to your meeting prepared with questions for your crowdfunding consultant, but when it’s all said and done, what have they asked you? If your crowdfunding consultant isn’t asking about you and your cause, you should question their motives.
- Reviews. A successful crowdfunding consultant should be able to provide reviews and references from other clients. If they don’t have testimonials or reviews published on their site, consider asking for references.
- Inexperience. The point of hiring a crowdfunding consultant is to benefit from someone with more experience than you. If your crowdfunding consultant can’t provide examples of successful campaigns, you should question if their assistance is worth the fee.
There are many reasons that there aren’t a lot of crowdfunding campaigns and services, namely that the industry is still young and a lot of entrepreneurs are doing it themselves. However, there are different types of crowdfunding consultants from mentors to managers and entire teams that provide assistance at various levels. Whether you are seeking guidance or someone to take on the campaign, be sure to do your due diligence when hiring a crowdfunding consultant manager.
Also, if you’re hiring someone to help with your crowdfunding campaign, be realistic about what you expect. Marketing a crowdfunding campaign is a huge challenge! You need to introduce a new brand, and a new product, build an audience from scratch, and convince them to give their money now for something that doesn’t even exist yet. With traditional companies these different marketing activities take place over a much longer time, and usually with a significant up-front budget. Don’t expect someone to do magically do all of this for you quickly and cheaply, and at the end of the day, remember, the success of your campaign will ultimately rest on the appeal of your product or project. You have to make something people want, and you have to convince them that you are the best one to do it.
How to set up a crowdfunding campaign
Crowdfunding is a way of funding a specific project by raising donations from usually through a time limited campaign.
It’s not new; war memorials, plaques and benches have been funded by small donations from communities for centuries. But the way that social media has developed provides the perfect conditions for crowdfunding as a fundraising tool to flourish.
Here’s how to get started….
Pick your project
A crowdfunding campaign needs to be specific, with a clear outcome. This could be launching a new service, creating a new product or holding an event. It should also be time-limited.
Write your budget and set a realistic funding target
You need to be clear about how much money you need and where it is going to go. As well as asking for funds you can also ask people to donate time and skills towards projects.
You also need to include any commission you’ll need to pay to the crowdfunding site and budget for any rewards.
Prepare your pitch
You’ll need a short video explaining what your project is, what you need the money for and what difference you’ll make. Your pitch needs to be clear, concise and grab attention.
Find a platform
A dedicated crowdfunding platform will take the pain out of managing financial contributions. There’s loads out there to choose from. Try Crowding In from Nesta created to help organisation pick the right platform.
You’ll need to decide between …..
donation only or rewards for contributions
With rewards based crowdfunding in return for backing your project people contributing usually receive a ‘reward’ from you. You could give thanks in your annual report, invite people to a special event or offer a gift.
There’s also loan and equity crowdfunding (find out more)
all or nothing or keep it all
Research shows all or nothing campaigns — where if you don’t reach your target you don’t get any of the funds raised — tend to be more successful, than keep it all campaigns.
Most crowdfunding sites offer an ‘all or nothing’ rule. You’ll need to hit your fundraising target for the money to be released to your project, so be realistic about what you can achieve from your backers.
JustGiving Campaigns allows you to raise money for your cause and turn people power into donations. There is no time limit to reach your target and people can even fundraise for your Campaign. And you’ll get all the money, minus their fees, even if you don’t reach your target.
Start your campaign
You’ll need a coordinated online campaign to get people to your crowdfunding page and donating. It shouldn’t be a surprise — let your supporters know before you launch what to expect and when.
Then invite your community through email and social media to back the project with pledges of cash. Encourage people to share your campaign and when they donate.
Try to get your most loyal supporters contributing right at the start to show demand, others might be more likely to give.
Keep in touch
Keep your supporters updated about the progress of the campaign and how close you are to the target. Thank them when they do contribute, let them know what difference their money will make.
Want to find out a bit more? Have a look at our crowdfunding guides on Funding Central