By: Bianca Buliga, Content Curator Intern
To crowdfund, or not to crowdfund: that is the question. Lucky for you, you can debate the pros and cons without suffering flashbacks to high school English literature.
You have likely watched “crowdfunding” become a hot topic and headline endless fundraising articles in the entrepreneurship information exchange. You may have even participated in a campaign without realizing it! But what exactly is crowdfunding and how does it work?
What is Crowdfunding?
It can be simply defined as the collective effort of individuals who network and pool their resources, usually via the Internet, to support efforts initiated by other people or organizations. However, those who have participated in crowdfunding understand that the process often transcends mere monetary gain. At its core, crowdfunding involves mobilizing a crowd of people that believe in something enough to assemble, creating a momentum of change-making and a web of financial reassurance.
What Qualifies as Crowdfunding?
While the origins of this fundraising methodology can be traced back to the late 1990s, crowdfunding did not truly take off until the launch of Kickstarter in April of 2009. To date, the Kickstarter community has helped tens of thousands of artists, musicians, filmmakers, and designers breathe life into their creative projects. In the past seven years, over 10 million people have backed a Kickstarter project, proving crowdfunding to be a legitimate and successful funding source for any and all purposes.
The last time you were scrolling through your Facebook feed, you might have seen your sister’s daughter’s best friend’s GoFundMe page requesting financial help for her upcoming semester abroad in New Zealand. Claiming to be the World’s #1 Personal Fundraising Website, GoFundMe has raised over $2 billion worldwide in the past year alone for travel expenses, medical funds, college tuition, and other worthy causes. The process is simple – an individual sets a fundraising goal, creates a campaign with a brief explanation, and shares the link to social media for friends, family, and complete strangers to contribute to.
More than 450 crowdfunding platforms with similar ideals exist worldwide, ready to launch campaigns of all shapes and sizes. IndieGoGo promises maximum impact by offering integrated analytics and feedback with its mobile app. GiveForward organizes meal deliveries for growing families and mending households. DonorsChoose.org helps public school teachers nationwide request much-needed classroom materials for their students. Razoo allows donors to search their website according to categories ranging from humanitarian aid to animal welfare. The common denominator? Providing a means for ordinary people to make an extraordinary difference in their community, region, and world.
Are there Different Types of Crowdfunding?
Absolutely. Crowdfunding is definitely not a one-size-fits-all fundraising approach. In fact, crowdfunding in general is not always the best option for every entrepreneur seeking to launch or grow a business. In order to reach full fundraising potential, it is vital for all campaigns to do their research and decide which category of crowdfunding might be most efficient for its particular needs and goals. There are four primary categories to consider: equity, lending, reward, and donation.
Otherwise known as ‘crowdinvesting’, equity-based crowdfunding enables investors to fund promising startup companies and small businesses in return for equity, or partial ownership of shares. As the startup evolves and becomes more successful, each investor’s piece of the pie increases in value. Research shows that this method of crowdfunding is most effective for startups wanting to establish themselves since it raises the largest sum of money per campaign of the four categories. However, this approach demands a longer timeline and is subject to limiting securities and financial regulation, creating headaches for many aspiring entrepreneurs. For the latest and greatest on how Title III of the JOBS Act works with equity-based crowdfunding, refer back to our recent guest blog post by Kristen Gluch, Director of Content Development for USEED.
Currently the fastest-growing category, lending-based crowdfunding focuses on creative and freelance work through the consolidation of platforms. This allows entrepreneurs to raise the funds they need in the form of loans that will be paid back over time in fixed payments with a set interest rate. Lending tends to take place over a shorter amount of time, and benefits entrepreneurs who would prefer not to immediately give up equity in their startup. SEED SPOT alum ZombieBox, received an interest-free loan of $7,500 (powered by 61 lenders!) through Kiva to be paid back over 27 months for R&D and intellectual property protection.
In terms of overall number of crowdfunding platforms, reward-based crowdfunding has become the most common category. This process usually results in the funder expecting a non-financial reward such as a token or limited release of a product. Rewards crowdfunding typically works best for client-facing, tangible products that require less than $100,000 in funding and are seeking a more expedited timeframe of just a few months. Through their Kickstarter page, SEED SPOT alum Agriscaping successfully amassed 203 backers who have pledged nearly $45,000 in order to bring elegant and edible landscapes to homes across Phoenix.
Oftentimes thrown into the same bucket as ‘nonprofit crowdfunding’, this category involves ordinary users supporting specific philanthropic projects. With their donations, funders contribute money to causes they wish to support with no expected compensation. This option is ideal for social causes or charities that request amounts of under $10,000. Support My Club accumulates donations by allowing community members to purchase items needed by public schools, ranging from athletic equipment to art supplies. The purchases are 100% tax-deductible, and the items are directly sent to the schools to maximize student engagement on their path to graduation.
A Few Quick Tips Before You Go…
A vast (and rapidly growing!) number of causes have found great success in fundraising using one of the above-mentioned categories of crowdfunding. But to truly assemble the masses and reach your dream fundraising goal, follow these steps carefully:
- Start advertising your campaign within your inner circle, then branch out. Begin by informing your staff, your Board of Directors, and the unique key influencers for your business venture. Next, target volunteers and friends, followed by your donors and overall social network. You will be pleasantly surprised by how many people are eager to help out aspiring entrepreneurs!
- Do not be afraid to ask clearly! “Give now or give on May 16th to have your donation matched!” Clearly state your requests to make your donors truly understand the cause you are passionately advocating for, as well as the positive impact you intend to have.
- And finally, tie your campaign to direct impact! “Your $10 donation provides 5 days of clean drinking water to a family of refugees in Somalia.” This allows donors to see exactly where their money is going, and provides them with a more tangible role in helping those in need.
At SEED SPOT, we understand the importance of linking entrepreneurs with the resources and information they need to turn their ideas into a reality. Stay tuned for more upcoming blog posts about crowdfunding and other fundraising techniques! In the meantime, comment below with any lingering questions you may have! Tell us how we can support you in making a difference in your community.
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