Crowdfunding Basics Explained

As the name suggests, crowdfunding means collecting small amounts of capital from several individuals and businesses to fund a new business venture. By leveraging vast networks of people through social media and crowdfunding websites, crowdfunding brings entrepreneurs and investors together with the potential of expanding traditional circles of business owners, venture capitalists, and investors.

Understanding the Nuances of Crowdfunding

Depending on the jurisdiction, there are restrictions on who can fund a new venture and in what capacity. These restrictions are in place to protect inexperienced investors from risking all their money. Since many new businesses fail, these investors have a high risk of failure. Crowdfunding allows new entrepreneurs to raise hundreds of millions of capital for their new business venture.

Anyone with an idea can invest and pitch the idea in front of investors. Usually, crowdfunding websites charge a small fee from the fundraisers to provide a secure and easy-to-use service. Most crowdfunding websites operate on an all-or-nothing model, i.e., you will get all the money if you reach your goal or all investors get their money back if you reach your goal. There are various kinds of crowdfunding, as explained below:

  1. Donation-Based Crowdfunding: Donation-based crowdfunding works by individuals donating money to support a business or social cause without receiving any financial gain or profit. The fundraiser is not obligated to give the donors anything in return for their contributions.
  1. Equity-Based Crowdfunding: In this model, the investors receive a small equity or stake in the business depending on the amount they invested.
  1. Rewards-Based Crowdfunding: Investors receive a non-financial reward, in the form of goods and services, in return for their investment.
  1. Debt-Based Crowdfunding: In this model, the fundraiser raises money to finance their business by taking small loans. They can range from high-interest loans to low-interest loans. This method is used when entrepreneurs can predict their cash flows to repay their lenders.

Challenges of Crowdfunding

The main challenge of crowdfunding is reliance on a large community of users, investors, and customers. These people must be fully engaged in your business mission and vision. You might have an innovative business idea, but you have to build the trust of investors to get them on board. They are going to invest in something they have very little idea about. It is quite risky for them. The key to success is complete honesty and transparency. Do not overcommit regarding the rewards you will give. Follow through on your promises to build gradual trust and loyalty.

Examples of Successful Crowdfunding Websites

Crowdfunding Basics Explained

Some of the most popular crowdfunding websites include:

  1. GoFundMe: GoFundMe is the largest crowdfunding platform. Since its inception in 2010, it has raised more than $15 billion through millions of donors. GoFundMe is mostly used for people who are seeking emergency assistance, those who are recovering from natural disasters or facing unexpected expenses. 
  1. Kickstarter: Kickstarter is the most popular crowdfunding website for new businesses seeking capital. Unlike GoFundMe, Kickstarter is exclusively made for sharing new business ideas and projects with the larger business community. Kickstarter cannot be used for donation-based fundraisers or projects that do not offer equity, revenue sharing, profit sharing, or investment opportunity. The site also lists prohibited items that claim to treat, cure, or prevent any illness or condition. Besides, it cannot be used to fund any political advertising, gambling, drugs or alcohol, coupons, or raffles. 
  1. Indiegogo: Indiegogo initially began to fund independent film projects and ventures but now accepts projects in any category. Being more flexible than Kickstarter, Indiegogo allows any kind of project. While Kickstarter releases funds only when the goal has been reached, Indiegogo allows the fundraiser to receive their funding on a pro-rated basis or wait until the goal has been reached.

Crowdfunding FAQs

What s crowdfunding?

Crowdfunding refers to raising small amounts of capital from a group of different individuals for a new business venture. Depending on the type of crowdfunding model, the funders may give the money without expecting anything in return or get equity or rewards for their investment.

What are the pros and cons of crowdfunding?

The biggest advantage of crowdfunding is getting access to a large community of investors and receiving the funding one needs. One also gets public opinion about their idea/product through crowdfunding platforms. The most significant challenge of crowdfunding is over-reliance on the online community of investors. Establishing trust and making them believe in your business idea is a difficult thing to do.  

Do you need to pay back any of the funds?

This depends on the type of crowdfunding model you use. In donation-based crowdfunding, the funding is completely altruistic, while you have to give some form of compensation in equity, rewards, or debt-based crowdfunding models. 
At Publir, we believe that crowdfunding allows you to get direct support from your users and allow them to become a part of your mission. By seamlessly integrating crowdfunding into your website, Publir Crowdfunding allows your readers to strengthen your voice by supporting you with one-click payments. Being used across a range of industries from politics to tech and entertainment, Publir Crowdfunding has helped businesses raise hundreds of millions of dollars.