How Does Crowdfunding Work: Tips For Beginners

How Does Crowdfunding Work: Tips For Beginners

Crowdfunding has long historical roots but is relatively young and innovative in comparison with traditional business funding options. Not so long ago, when someone wanted to raise capital for a venture idea, they had quite a few methods with which to achieve this. But with the development of technology and the Internet, crowdfunding has connected millions of young entrepreneurs with financial sponsors worldwide and gained immense popularity due to its simplicity and accessibility. 

This article is for those who don’t know how to run a successful crowdfunding campaign but would like to learn the basics. You will learn how crowdfunding works and find simple but effective crowdfunding tips for beginners.


What Is Crowdfunding?

How Does Crowdfunding Work?

Types Of Crowdfunding for Business

Best Crowdfunding Sites

How To Run A Successful Crowdfunding Campaign

5 Crowdfunding Tips for Beginners

Final Thoughts

What Is Crowdfunding?

First, define the term. You have a business idea or a business need, and you need a certain amount of money to fund it. You reach out to a crowd of individuals who can collectively provide you with the necessary amount to fund your venture. That’s it.

So, crowdfunding is raising small amounts of money from many different sponsors so that you can get the total amount of money you need.

A crowdfunding investment is a type of alternative finance crowdsourcing. You don’t have to go to a bank or any other financial institution for your business funding. If you want to support your business idea through crowdfunding financially, you need to pitch it to the crowd. 

Unlike some other types of investment, you don’t pitch to (or ever meet) these people in person. Usually, the whole process runs online through specialized crowdfunding sites. Interested people contribute small individual investments to help a company, a product, or a project they like to get started. 

Crowdfunding is particularly good for startups and innovative product ideas. Actually, 40% of all crowdfunding investments are focused on business and entrepreneurship. The global crowdfunding market is around $30 billion, with North America being the leading region in the industry. 

How Does Crowdfunding Work?

Now that we know what crowdfunding is, let’s try to learn how crowdfunding works.

Usually, crowdfunding for business campaigns consist of these major parts:

  • Goal. How much money do you need and what is the money for?
  • Incentives. What will those who invest get for their donation?
  • Timeline. What is the deadline for getting the decided amount?

One of the most significant specifics of crowdfunding is that businesses can only get investments if the project reaches the amount of money set as the campaign’s goal. These regulations are supposed to protect unsophisticated or non-wealthy investors from a high risk of losing their savings. It is also required that you unveil certain financial information in order to raise funds. To fulfill these specific financial reporting obligations, you can use accounting software such as Synder to prepare all the necessary information and statements required by law. 

You need these 3 aspects  in order to succeed in your crowdfunding project:

  1. A campaign initiator, who introduces the idea.
  2. Individuals or groups interested enough in the idea to invest (also called “backers”).
  3. The crowdfunding platform, where you can reach out to the sponsors and get the money from them.

Each person on the crowdfunding platform selects the projects in which they believe. They sometimes play a donor role and may contribute without expecting any monetary payoff in the future, or in some cases, they become shareholders.

When the individual sponsors start making their contributions, often, it has a snowball effect, triggering the crowdfunding investment process. Sponsors who are genuinely interested in the successful completion of the project may distribute information about the project further, serving as free promoters to the idea they help crowdfund. This influences the ultimate value of the offerings and outcomes of the campaign. 

It is not uncommon that free advertising and a ready-made audience come as a pretty good bonus for the campaign, thereby reducing marketing costs for the product launch. This makes crowdfunding one of the best small business funding options for entrepreneurs with limited start-up capital.

Types Of Crowdfunding for Business

As previously mentioned, your crowdfunding project should present a specific incentive to make people want to invest in your idea. Basically, the return on crowdfunding investment can be:

  • financial, or
  • some sort of non-monetary reward

Based on what backers get in return, there are two principal types of crowdfunding for business.

Equity crowdfundingReward-based crowdfunding
Equity crowdfunding is the collective effort of individuals to support ventures initiated by other people or organizations through finance procurement in the form of equity.
This type is also called non-equity crowdfunding. People donate to achieve a particular reward connected to the project they support. 
The business owner must produce and market the product announced in the crowdfunding campaign and offer securities for a return on investment.For example, backers want to use some innovation that wasn’t present on the market before. Or they may expect to get the product they fund earlier than anyone else.

Best Crowdfunding Sites

There are hundreds of online platforms to do crowdfunding in the US.  The key global companies providing crowdfunding help are Kickstarter, Indiegogo, GoFundMe, Fundable, Patreon, Fundrazr, Campfire, AngelList, GoGetFunding, DonorsChoose, Crowdfunder UK, Crowdfunder, Milaap, RocketHub, Companisto, Crowdo, and many others.

Let’s explore what the best crowdfunding sites to fund your next big business idea could be. We will discuss some helpful crowdfunding platform stats too.

  1. Kickstarter is the most popular option to do crowdfunding for startups. It has the highest number of completed business-oriented projects. Having an average of 135 backers for each campaign, Kickstarter becomes the platform with the audience most open to new innovative commercial ideas.
  1. Indiegogo is a more flexible crowdfunding platform, compared to Kickstarter. Interestingly, Indiegogo initially focused purely on funding independent films, but later, it began accepting projects from any other category. Luckily for many small business owners, as it holds the highest average project funds raised at $172,473. 
  1. GoFundMe is one of the largest crowdfunding sites, as it is number one for individual projects. It has 0% fees and a payment processing fee of 2.9% and is the cheapest in that regard. No wonder it is so popular among people seeking to raise money for personal projects.

Note that many of the sites charge investors a fee ranging from 5% to 12%. So look out for the platform fees information before choosing the right one for your project. 

How To Run A Successful Crowdfunding Campaign

To run a successful crowdfunding campaign isn’t an easy task. Nearly three-quarters of all business ideas fail to raise the set amount of money from backers. Most of those that do, however, end up exceeding the desired goal significantly. On average, successful crowdfunding campaigns raise $20,000-40,000 of investment. 

Starting on the right foot is the key to a campaign’s success. This is why every good crowdfunding project begins with good preparation. You need to think out every detail of your pitch and marketing beforehand and come to the people prepared, with a well-thought-out offer.

Bear in mind that many backers will like your product or service idea, but they may hold off from investing until they can see how your project develops. Remember about the snowball effect? Herd behavior is typical of crowdfunding. 

It is essential to keep your backers regularly updated on the progress of your campaign and engaged with your content. Give them something to come back to. It can make a huge difference and define the success of the whole venture. 

Make sure to provide:

  • a good idea pitch
  • engaging and personal content
  • plenty of video and image material 

If you want to hook people, you will need to present them with details. It is always a good idea to be very specific about what you are raising the funding for and where the money will go. 

Be ready to explain clearly:

  • What is unique about your business idea?
  • How much money do you want to raise?
  • Why do you want to raise precisely this amount?
  • How much have you raised so far?
  • What will you use this money for?
  • How long is the project open for investment?
  • How many people have already invested?
  • What will sponsors receive in return on investment?
  • If they receive shares in the company, then how many?
  • If they receive another type of reward, what will it be?
  • How and when will sponsors receive their return on investment or reward?

5 Crowdfunding Tips for Beginners

If you want to know how to do crowdfunding well, you can always hire a crowdfunding consultant. There are many professionals offering crowdfunding help for beginners. But if you want to know how to run a successful crowdfunding campaign on your own, check out the following tips.

  1. Prepare a polished business presentation. Present your company and a product or service in the most polished way. Try to identify what makes it special and innovative — it will be your unique value proposition (UVP). Describe your company’s history and back this up with some facts to explain why people should put trust in you, and your idea.
  1. Use PR and marketing promotion techniques. Just posting your project on the crowdfunding site isn’t enough. You need to go loud where you possibly can. Share links and promote your campaign through social media, send email newsletters, contact bloggers who might be interested in providing more coverage of your project.
  1. Ask for crowdfunding investments early on. Start the buzz as early as you can. Reach out to possible sponsors, who may be among your friends and family, even before you set up a page on a crowdfunding platform. Search out for potential contacts for promotion beforehand too. The earlier you begin advertising your project, the more likely you will reach your fundraising goal. Statistically, 42% of funds are raised in the first and last three days of the campaign. 
  1. Offer incentives and keep people engaged. Offering incentives is a great way to build an emotional connection with the backers and make them remember your campaign. Just make sure that you choose incentives that your sponsors will be interested in.
  1. Update supporters on the progress of the campaign. People have short memory spans, especially on the Internet. The more regularly you update supporters, the better. Keep your campaign page active. Others will see how far you’ve come with your fundraising campaign.  They will be more likely to remember you and share the information about your project with their network.

Hopefully, these crowdfunding tips will help you succeed with your project. Save it to your reading list if you liked it, and share it with your fellow entrepreneurs if you found this article helpful.

Final Thoughts

Crowdfunding is genuinely one of the most popular small business funding options for individual entrepreneurs, go-getters, and innovative thinkers. It creates alternative investment opportunities for many people who can’t or don’t want to raise money for a business venture via traditional financial institutions. 

Anyone can pitch to anyone online on crowdfunding sites that serve as the intermediary between the innovators and crowds of private investors.

Indeed, these platforms are saturated with excellent business ideas. Who will get the money? One of the best crowdfunding tips to attract the desired investment is to bring a clear and unique solution to the market.

Just don’t forget to keep your books in order, if the financial reporting is required by regulation. This is always easy to do with reliable accounting automation like Synder. By the way, it’s free to test! Would you like to try now?

Olga Shvets

Olga Shvets

Olga is a FinTech writer with a degree in communications and business experience in e-commerce. Passionate about all things connected with money and the principles of human behavior. Financial psychology and trends of global markets are her favorite topics to investigate.

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