What is Crowdfunding and How it works: Everything You Need To Know

what is crowdfunding

Crowdfunding is a relatively new way to raise money for a business, project, or cause. It involves soliciting donations from a large number of people, usually through the internet. This can be an extremely effective way to raise money, but it’s important to understand how it works before you get started. In this blog post, we will explain what is crowdfunding, how it works and everything you need to know and how you can use it to your advantage!

What is Crowdfunding?

Crowdfunding is raising small or large amounts of money through the efforts of a number of people. Usually Crowdfunding means that you are trying to raise funds for some type of project or venture. Usually, in return for their support, donors get something like a T-shirt, book, experience…like this:

You could think about it as sort of pre-selling your idea/product before production. You can create an amazing product and show it to the world! It’s important to share with every potential donor the value they’re going to get in exchange for their donation (and how many times can they contribute) – usually called “rewards”.

It is also possible that when you don’t have a product to sell or simply need money, Crowdfunding can be used for non-profit purposes. For example:

To raise funds to start a school in Africa.

If you plan on starting your own business, it’s also possible to use crowdfunding, only – instead of selling products and services (like in the case above) – you’re offering equity or debt .

Types of Crowdfunding

There are many different types of crowdfunding, but what is most common is what’s known as “reward based” or “perk based.” This means that donors receive a reward in exchange for their contribution (usually some sort of product). However, not every type can be started by simply setting up an account on Kickstarter or Indiegogo; they must first meet certain requirements set forth by these platforms. Here’s how to get started with each type:

  • Equity Crowdfunding: For this type, it will depend what country you live in because there are laws governing how much equity can be offered through crowdfunding platforms. In the US, there is what’s called a JOBS Act that says you must have “accredited investors.” This means someone who has more than $200K in income per year or $300K with their spouse, and this amount increases every two years by inflation adjustment amounts. If your campaign does not meet these requirements then it can only raise up to $50 million dollars from non-accredited entities (which are usually private individuals).
  • Debt Funding: For debt funding campaigns like loans, what happens when someone pays off what they owe? Then they get paid back plus interest! It’s important not just raise money but also build relationships with donors because if they see what makes sense financially then it will help you raise more funds in the future.
  • Reward Funding: For reward funding campaigns like Kickstarter, what happens when someone pays what they owe? Then they get what was listed as their perk (i.e., t-shirt, mug) or service fulfilled within a certain time frame (which is often up to six months after campaign ends). This means that an entrepreneur might need to wait until then before getting any money from donors who pledged but haven’t paid yet because of how these platforms work; however it could also be an opportunity for them to build relationships with early adopters who will hopefully support later projects too!
  • Donation-based Crowdfunding:

How Does Crowdfunding Work?

There are many crowdfunding platforms that let you create your own Crowdfunding project. Usually the workflow consists of these steps:

1 – Pick a platform

2 – Create your page with all the details about what you’re trying to do and why would someone want to support you. Also include some images, videos…anything it takes to convince people that this is worth their time (and money). 

3- Build your audience by getting friends/family involved first and then try reaching out to other like minded people in social media channels or online forums . You can also use influencers who might be interested in what you’ve got going on. It’s very important though, that you don’t just spam your project to everyone – each person needs to feel special.

4- Share, share and share again!

5- Once the campaign is over see what you’ve raised and start doing all those important things so it can turn into something real .

Crowdfunding Platforms

There are many platforms out there for Crowdfunding , but the most popular ones at the moment are Kickstarter (for Rewards based projects), Indiegogo (for more versatile projects) and GoFundMe (for personal finance). 

Sometimes it might be necessary to use all three of them in order to achieve the expected results! We’ll come back on this topic later on…

Learn More: Top Crowdfunding Sites To Launch A Crowdfunding Project and Raise Funds.

In theory, Crowdfunding is an amazing tool, but the road to success is not paved with gold. It can be difficult to create a successful crowdfunding campaign if you don’t follow the rules…but what are these rules?

Crowdfunding Promotion: Tips from Successful Creators

Well…there’s no one way to do it, but there are definitely some things that need your attention when putting together your project in order for it to become something big.

  1. People will judge you by your page before they like/follow/share/support you make sure it looks good! Make them feel special and let them know WHY should care about what’s hiding behind that “I need help” button . In other words: get their empathy! Give people a reason why they should back you up. A great example is the story behind the Pebble Smartwatch that raised 10,000 times its expected goal .
  2. Have a great pitch! After you’ve built up some trust via your fantastic page, you need to convince people to back off. Convince them why YOU are worth their money and what’s in it for THEM . The more specific your plan is, the better. Show how you will use the funds , what YOUR role will be and what makes YOU so special – think of this as a business plan (without all those boring numbers and statistics).
  3. Make sure that people can express how much they like/love/appreciate your idea by backing it with money (and not just tweets or likes ). Make them part of something bigger than they could ever achieve alone.
  4. Make a list of your supporters and keep them engaged throughout the campaign . Send them messages, updates…let them feel appreciated – they might even share their experience with others! Give more to those who give more – make sure everyone is happy and fulfilled!

 

Learn More: How to Run a Successful Crowdfunding Campaign: Tips From Successful Creators

Now you’ve got all these great people involved why wouldn’t you try making the most out of it? Here are some ideas that will help you use Crowdfunding as a marketing tool:

  • Make an infographic about your project and send it to bloggers/website owners. Include some images from your page so they can see what’s behind all this fuss.
  • Did someone say social media? Try reaching out to influencers on Twitter, Instagram, Facebook…you name it. Tag them in your campaign updates or include their accounts in your description to gain some exposure .
  • Make an email list of all the people that showed interest in your project and send them a weekly update on how things are going. This way you will stay engaged with them and they might share details about your crowdfunding with their friends/acquaintances.
  • Collaborate! See if there’s anyone else out there who would like to partner up for a cause – bring together similar ideas and combine forces . You can do something really special when working with other people.
  • Try getting press involved by contacting media outlets, journalists etc…they might pick up on what you’re doing and write articles about you/your project.
  • Make a Youtube video and upload it on popular channels! Maybe even go live on Facebook or Instagram to get people involved in real time – they’ll love feeling part of the action!
  • Show your gratitude by organizing contests with some great prizes, giveaways etc…you can also consider doing something for your funders that is not directly related to the product/service you’re offering at this stage. This way you will get them even more engaged.

Conclusion

Crowdfunding can be an extremely effective way to raise money for your business, project, or cause. It’s important to understand what is crowdfunding and how it works before you get started, and make sure you have a clear goal in mind. If you follow these tips, you should be able to successfully fundraise through crowdfunding!

Cheers.

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