What is Crowdfunding? The Basics

by Startacus Admin

Crowdfunding is all the rage nowadays, goodness knows we have been talking enough about it over the past while, incidentally, click here to see some of our recent crowdfunding related posts.

But amidst all of this, it occurred to us, having delved into the depths of almost every aspect of crowdfunding, we have never provided a ‘back to basics’ style summary of what it actually is. To remedy this so…

Crowdfunding - A back to basics style summary

Crowdfunding is (as its name suggests) the process of funding a project or business venture by raising many small amounts of money from a large number of people. It is a process that usually takes place on the internet and is facilitated on a growing number of social network style websites called crowdfunding platforms.

These platforms provide you with a forum on which to ‘pitch’ your project / business to an audience, in the hope that they will find it so interesting / rewarding that they make a small financial contribution to it. Most crowdfunding platforms operate under the rule that, when creating your project, you set a target of the mount of money that you would like to raise. If you reach this target then the money is yours, minus a small percentage which goes to the host platform. If you fail to raise at least your target amount then you don’t receive anything.

Types of Crowdfunding

Crowdfunding can encompass a whole range of money raising processes, not all of which take place on the internet, and some of which have been around for many years.

The older, traditional crowdfunding techniques still in existence include things like charity fundraising campaigns, but today the term crowdfunding has become synonymous with the online process of raising money through a crowdfunding platform.

Within the online realm there are two main types of crowdfunding, which are distinguished by what is offered by the beneficiaries, to the benefactors in return for their contribution to the campaign.

Equity based crowdfunding - In this case the benefactors or ‘the crowd’ are offered shares in the business as an incentive to make a contribution.

Reward based crowdfunding - Here, ‘the crowd’ are given products or services as a reward for having made an investment. These products are usually something directly connected to the campaign, the value of which depends on the level of investment made.

If you are going to launch your own crowdfunding campaign, you should check out our free crowdfunding support package!

Where is the Crowdfunding industry going?

Improvements in information technology have helped contribute to a monumental rise in the size of the online crowdfunding market. In 2013, the industry as a whole expanded by almost 100 %, a record which many are suggesting could even be surpassed this year - in fact by 2025 (all going to plan) leading experts reckon that crowdfunding could be worth around $90 Billion, which would be about $12 for each person on the planet.

Innovations have been slow to arise amongst the established crowdfunding platforms, mostly because it has proved to be such a winning formula, that none of the big players have been keen to risk throwing a spanner in the works. But such is the level of competition within the marketplace now, that innovative amendments are once again on the cards. For example, Indiegogo has recently announced the advent of ‘ongoing funding’ which allows you to continue crowdfunding even after your campaign termination date.

Frequently asked questions

(If you have any other questions about crowdfunding, we'd be delighted to answer them!  Just pop them into the 'comment' section below)

Can anyone crowdfund?

Technically yes, but most platforms review all campaigns before making them live as a means of quality control. So it’s important to make sure your business / project is as well formed as possible before you begin the process.

What happens if my campaign doesn’t reach its target by the campaign end date?

Then we’re afraid that you don't get anything - but at least you’ve got some good exposure!

What happens to the money that has already been donated if my campaign fails?

This money is returned to the donor with a smile and a ‘please come again’.

Can my campaign raise more than its target amount?

Most crowdfunding platforms will automatically allow you to raise more than your target amount.

How long is the average crowdfunding campaign?

7 Weeks (Although this number varies greatly depending on the financial target)

What is the average amount of money raised?

Around $7,000 - So say crowdfunding platform Fundable

Hopefully you have found this little crowdfunding back to basics summary useful. If you are especially interested in this topic, you might like to take a look at these recent posts.

Working the crowd, How to make the most of crowdfunding

Why consider seed investment via crowdfunding?

Indiegogo pilots forever funding

Keep your eyes peeled next week as we give a rundown of the our top 10 crowdfunding sites!

 

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Published on: 28th October 2014