Thinking about crowdfunding your business venture? Investopedia defines crowdfunding as “the use of small amounts of capital from a large number of individuals to finance a new business venture.”
There are four types of crowdfunding platforms. They are generally categorized by what the backers get in return for their money.
- Reward-based crowdfunding – In return for a monetary contribution, supporters will get some sort of reward. It could be a book with a personal dedication in a crowdfunding campaign to publish a book or tickets to the premiere in a crowdfunding campaign for a movie production. Kickstarter, Patreon, and Indiegogo are well-known reward-based crowdfunding platforms.
- Donation-based crowdfunding – People who back these kinds of campaigns are more donors than backers. They do it for the cause, such as raising money for a sick person or to save animals. This type of crowdfunding is common among non-profits. You’ll find such campaigns on platforms like GoFundMe and Indiegogo.
- Equity-based crowdfunding – This type of crowdfunding enables businesses to raise money from the public in return for equity in the company, and the backers get shares. Equity-based crowdfunding is growing in popularity, because it allows startup companies to raise money without giving up control to venture capital investors. Republic, Seedinvest, Crowdcube, and Wefunder are a few examples of such platforms.
- Lending-based crowdfunding – This type of crowdfunding is different from all the ones above. People can get loans from the public instead of banks in return for interest. Lendingclub is an example.
Most crowdfunding platforms make money only if you do. In a sense, a crowdfunding platform is betting on you since it provides you with tools, support, and resources for your campaign. Obviously, the websites prefer to bet on people who take their campaign seriously.
The crowdfunding platforms make money through fees and offer two types of campaigns:
- All-or-nothing campaigns: You must hit the goal you set in order to keep the funds that you’ve raised. Typically, the platform takes 5% of funds raised if you are successful.
- Keep-what-you-raise campaigns: You can keep the amount of funds that you’ve raised, even if you haven’t hit your goal by the end of the fundraising duration. Platforms usually will tack on a fee if you do not hit your goal so that their total fee is 8-10%.
You can also expect a payment processing fee with most crowdfunding platforms. The fee averages about 3%, though it varies from platform to platform.
As with anything in business, there is always prep work to do before you start. The same goes with crowdfunding. Here are a few tips from a Forbes article to help you boost your crowdfunding campaign.
- Do product surveys before launch
- Gather email sign-ups through Facebook ads
- Focus on your campaign draft
- Do some market research on pricing
- Identify your campaign ambassadors
- Have a post-crowdfunding plan in place
- Set your fulfillment dates right
There are no miracles in crowdfunding. A lot of dedication and marketing is needed to make your campaign successful.
Marketing your crowdfund is just as important as marketing an actual product or service, so plan to spend plenty of time in promoting a crowdfunding campaign.