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What is crowdfunding?

What is crowdfunding?

Crowdfunding is one way to raise capital for a business venture. And if you’re an entrepreneur with a great idea, it could provide the funds you need to get your business started. But there’s a lot to know about crowdfunding before you create a successful campaign. This article dives into everything small business owners should know about getting started with crowdfunding. In this article, you’ll learn:

  • What crowdfunding is
  • Common crowdfunding challenges
  • How to get started with your first campaign

What is crowdfunding?

Crowdfunding is a type of business funding that lets you raise funds online by reaching a large and diverse pool of potential investors.

You can use crowdfunding to launch a new project or start your business. Sometimes individuals use it 

to help them fund a project involving creative work or overcome a financial challenge, such as exorbitant bills for medical care. Nonprofit organizations also use it to raise funds quickly.

In North America, over $17 billion is raised every year through crowdfunding. 

Crowdfunding works by tapping into a larger number of potential donors. You might raise thousands of dollars or more through small donations from hundreds of individuals and organizations.

And with over 1400 crowdfunding platforms in the United States, there’s no barrier to entry to getting started like there is with other types of funding.

You don’t need a high credit score or collateral to appease a lender. Nor do you need to jump through hoops to attract deep-pocketed investors. You just need a profitable business plan and a solid marketing strategy that makes your campaign stand out. 

Is crowdfunding a good way to raise money?

For some startups and business owners, crowdfunding is ideal. For one, you don’t have to have a history of profitability to get funds. You also don’t have to give up potential control of your company. 

Compared to other options, it’s an easier way to raise money. But there are challenges and risks. You might not raise the amount of capital you need, leaving you to search elsewhere for more funding. Even worse, you might not get anything. 

Only about 1 in 5 campaigns are successful, so there are a lot of crowdfunders out there that aren’t hitting their goals. 

What are the challenges of crowdfunding?

Crowdfunding might be accessible. But it’s not a free source of money. You have to invest time and money into your campaign, with no guarantee you’ll get the capital you need for your project. 

Here are some of the drawbacks all business owners should be aware of before getting started:

  • There are fees. For Kickstarter campaigns, for example, the platform takes a 5% fee for successfully funded campaigns. Payment processing costs another 3% to 5%. 
  • Some crowdfunding sites don’t award you anything unless you reach your goal. 
  • Because it’s more accessible than other business funding options, there’s more competition. That means you need to work harder to stand out. 
  • You have to create and implement a cost-effective marketing campaign to generate widespread interest.

Here’s the bottom line: it’s not a surefire path to funding success. You don’t want to spend weeks planning and managing a crowdfunding campaign without results.

So how can you approach this type of business funding without sacrificing resources?

Put in the planning necessary. A stellar campaign can potentially meet and far exceed your goals. Take the Kingdom Death: Monster 1.5 Kickstarter campaign, for example.

Backers for this horror board game pledged over $12 million! 

While your first time using a crowdfunding platform could be a wild success, don’t assume you’ll raise millions. Keep your expectations grounded and use this type of funding for what it is—a potential source of a few thousand dollars.

In the US in 2023, the average funding amount for crowdfunding campaigns is $7.75k

How to start crowdfunding

Getting started involves deciding what type of campaign to use and then creating your strategy. Here’s what you can do to get the ball rolling. 

Identify the type of crowdfunding that aligns with your funding goals

There are different types of crowdfunding campaigns. As a small business owner, you’ll probably choose rewards-based crowdfunding, debt-based crowdfunding, or equity-based crowdfunding for raising capital. 

Donation-based funding

How it works: People donate for nothing in return.

Who's it for: Nonprofits and individuals asking for help with a worthy initiative

Popular crowdfunding platforms: GoFundMe, Fundly

Rewards-based crowdfunding

How it works: Your business offers a reward, such as a product or a t-shirt, in exchange for backing. 

Who's it for: Early-stage companies and product-based startups. 

Popular crowdfunding platforms: Kickstarter, Indiegogo

Debt-based crowdfunding

How it works: Backers pledge a loan that is repaid with interest on a set date. It’s a type of peer-to-peer lending.

Who's it for: Small to medium-sized businesses. 

Popular crowdfunding platforms: Honeycomb Credit, Mainvest

Equity crowdfunding

How it works: Your business gives equity, such as shares in the company, in exchange for funding.

Who's it for: Startups looking for funding from accredited investors. 

Popular crowdfunding platforms: AngelList, SeedInvest

Compare crowdfunding platforms

Once you know which type of crowdfunding is right for your project, you can start comparing the different crowdfunding sites. When evaluating platforms, here’s what you should look at:

  • Fees: What percentage of your funding will they take? Also, look at fees for payment processing and launching a campaign on the site. 
  • Terms: Are there funding limits? What about restrictions on the types of projects allowed? You should also check details, such as how long you have after the campaign is finished to send out rewards or repay your debt.
  • Past campaigns: Have other businesses similar to yours succeeded on the platform? How much funding did they get? This information will help you determine what you can expect.  

Share your story

At this stage, you want to identify why people would choose to invest in your campaign. You’ll need a compelling story to generate interest. Harvie is a great example of a campaign that found success through storytelling. The Pittsburgh-based food-delivery company has raised close to half a million dollars on Honeycomb Credit. 

Harvie’s secret sauce? This startup doesn’t just have a profitable business model. It’s also on a mission to revolutionize the food industry by supporting local farmers and food producers and taking chain grocery stores out of the equation. 

You might not have a plan for bettering society built into your business model. But you are trying to help your customers through your products or services. Make sure that story resonates in your crowdfunding campaign. 

Create your marketing strategy to generate interest

Effective marketing is key. You need to convince a large number of people that what you’re trying to accomplish is worth their support.

Marketing for your campaign can involve a separate website, a video to demonstrate why a product, service, or business venture is worth backing, and promotion on social media and email. 

The more interest you create, the easier it is to reach people who might want to fund your project. 

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