You have a business idea and have worked on your plan for a few months. You’ve even invested all your savings but feel now’s the right time to raise capital for your new project.
Getting a bank loan will cost you due to interest rates. And accredited investors may want shares in your company. But you don’t have to go that route to get funding.
Crowdfunding provides an alternative way to raise capital while gauging if your product or service is in demand and building trust with your first customers.
But what is crowdfunding, and how does it work? We’ll cover all that and more.
What is crowdfunding?
As the name implies, crowdfunding is a process where a “crowd” funds a project, business or charitable cause instead of one or two big investors. In other words, it’s raising funds by collecting small amounts of money from many people, often through the Internet.
For a crowdfunding campaign to be successful, you must capture the attention of many backers and convince them that your cause deserves their investment.
How does crowdfunding work?
Crowdfunding starts by coming up with an idea or project you want to pursue. This could be anything from a creative project or a new product to a charitable cause.
After this, go to a platform like Kickstarter, Indiegogo or GoFundMe and set up your crowdfunding campaign. Then, add a financial goal and a deadline. Remember, your goal will vary based on the nature and scale of your project.
Once you’ve set up your campaign, you need to share it widely through social media and your business’s website to attract backers — people interested in your project who want to contribute through the crowdfunding platform.
You can then collect the money when you achieve your campaign’s goal (usually minus the platform’s fee). Depending on the nature of your campaign, you may need to update backers on the project’s progress and, if applicable, give them the promised rewards once you complete it.
Examples of crowdfunding
The crowdfunding market has grown steadily since its modern inception in 1997. Not counting debt- and equity-based crowdfunding, its total transaction value rose to $1.1 billion in 2023. With this type of financing, many business owners have been able to start and grow profitable companies over the years.
Some examples include:
- Pebble Time: Pebble Technology created its crowdfunding campaign on Kickstarter and had over 78,000 backers. The campaign aimed to raise $500,000 but crushed its goal with over $20 million pledged.
- MATE X foldable eBike: Christian Adel Michael raised over $17.5 million on Indiegogo with over 31,000 backers.
- Coolest Cooler: Ryan Grepper created this campaign on Kickstarter and had over 62,000 backers. The campaign’s goal was $50,000 but ended with over $13 million.
What are the pros and cons of crowdfunding?
Here’s an overview of crowdfunding’s pros and cons:
| Pros of crowdfunding | Cons of crowdfunding |
|---|---|
| You can raise significant funds, which could be challenging through traditional financing sources, like banks or investors. | There’s a high risk of campaign failure (over 358,000 projects have been unsuccessfully funded on Kickstarter). |
| You can gauge interest in your product or project before fully committing to it. | You must pay platform fees and upfront costs, like promotional videos, marketing and developing prototypes or samples. |
| It often doesn’t require giving up a share of your company, meaning you can retain complete control over your business. | Presenting your idea or product on a public platform before you fully develop it can expose it to the risk of being copied or stolen. |
| There’s less financial risk since you secure funding upfront, and money is often returned to the backers if you don’t meet your goal. | |
| You can set your own fundraising targets, deadlines and rewards for backers. |
What are the different types of crowdfunding?
Let’s now look at the different types of crowdfunding you can choose based on the kind of project you want to pursue.
Rewards-based crowdfunding
In this crowdfunding type, individuals contribute to a project in exchange for a service or product.
For example, let’s say you’re running an eco-friendly water bottle project. In this case, you could add a reward structure like the one below:
- $10 pledge: A thank-you email and a digital booklet about sustainability and reducing plastic waste.
- $25 pledge: One eco-friendly water bottle.
- $50 pledge: One water bottle and a branded, reusable carrying bag.
- $100 pledge: Two water bottles, two carrying bags and their name on the website as a supporter.
- $250 pledge: A family pack of four water bottles, carrying bags and a virtual tour of your sustainable production process.
Donation-based crowdfunding
In donation-based crowdfunding, people donate money to support a charitable cause without expecting anything in return. It’s best for nonprofits.
Let’s say you’re running a campaign to help build a community library. People would support you because they care about the project, as it will help others and not necessarily be for any profit.
To build trust, you’d have to give regular updates about the progress during fundraising and, later, how the construction is going. For instance, you can create posts on the crowdfunding platform about your campaign that link to articles on your website that offer more information about the library’s construction.
Equity-based crowdfunding
Equity crowdfunding enables you to raise capital for your company without the hassle of acquiring a traditional business loan or giving up control to venture capitalists.
Here, you attract investors willing to fund your company in return for unlisted shares (those that aren’t sold or bought on an official stock exchange). The Securities and Exchange Commission (SEC) regulates this form of crowdfunding in the United States.
Debt-based crowdfunding
The alternative to equity crowdfunding is debt crowdfunding, which can include mini-bonds, peer-to-peer lending and invoice financing. This is essentially a loan, but instead of getting it from a bank, you get it from many people online with much better terms.
Debt crowdfunding eliminates the go-betweens typically involved when getting a bank loan. As a result, you can keep the costs down while giving lenders a better rate of return (RoR).
That said, you may need a good credit score before you get this type of crowdfunding. Also, since it’s a loan, you’ll have to pay it back with interest.
Popular crowdfunding platforms
Some of the most popular crowdfunding websites include the following:
1. Kickstarter
Launched in 2009, Kickstarter is among the best crowdfunding sites for entrepreneurs and startups. At the time of writing, the platform has close to 23 million backers who’ve collectively pledged over $7.7 billion and successfully funded over 249,000 projects.
The fundraising website is an “all-or-nothing” platform. This means you can only access your funds if you meet your initial target. If you don’t, then your funders keep their money.
Fees: If you have a successful crowdfunding campaign, Kickstarter will collect a 5% fee and charge you between 3% and 5% for payment processing.
2. Indiegogo
Indiegogo is an ideal crowdfunding site for small businesses and nonprofit organizations. It was founded in 2008 and has over 10 million people visiting its website and about 19,000 crowdfunding projects launched monthly.
One of the standout features of this online platform is its InDemand option. When you choose it, you can continue to raise funds and engage with backers even after your crowdfunding campaign ends.
Fees: Indiegogo charges a 5% fee on all the funds you raise for your campaign. You also pay a processing fee that varies based on your currency and location (3% + $0.20 for American projects).
3. GoFundMe
GoFundMe launched in 2010 and has raised over $25 billion from over 200 million donations. It’s ideal for personal fundraising campaigns, like offsetting a huge medical bill.
The platform offers a donor protection guarantee, which helps supporters get a full refund if something goes wrong, like a donation being misused or fraud.
Fees: The platform charges 2.9% + $0.30 for each donation.
4. Patreon
Patreon focuses on creators like YouTubers, bloggers, podcasters and musicians. The platform, founded in 2013, has over eight million monthly active members. Since its inception, it has paid out over $3.5 billion to creators.
With Patreon, you can offer supporters monthly subscription plans for special community perks, like shoutouts, sneak peeks or other exclusive content to repay them for their support.
Fees: You can get started with Patreon for free. The platform also has two paid membership plans. The Pro plan charges 8% for the income you earn from Patreon, while the Premium plan takes a 12% cut. The payment processing charges depend on your tier price, sales tax/value-added tax (VAT) and currency conversion fees.
How to crowdfund
Now, let’s cover four steps to follow to make sure you start your crowdfunding campaign on the right foot:
1. Choose the right type of crowdfunding
The first step to starting a crowdfunding campaign is to choose the model that aligns with your project’s nature and goals.
For instance, if you want funding for creative projects, you might use a reward-based model, while startups looking for investors might opt for equity-based crowdfunding.
2. Read the fine print of each crowdfunding platform
Different platforms charge different fees. Some take a percentage of the total funds raised, while others charge extra for processing payments.
Moreover, make sure you understand the platform’s policies. For example, Kickstarter doesn’t allow political fundraising or incentives like revenue sharing and equity.
3. Determine how much money you want to raise and why
Once you pick your platform, calculate the amount of money you need to complete your project. Factor in costs like production, shipping, taxes and platform fees.
Plus, be transparent about why you need the amount you’re asking for. Backers are more likely to support your campaign if you clearly explain how you’ll use the funds.
4. Share your crowdfunding campaign
After you’ve set up everything, it’s time to promote your campaign. You can create videos and other content to help supporters understand your fundraising goal.
Post this content on your website or use social networks like Facebook, Twitter (now X) and Instagram to spread the word. You can also reach out to friends, family members and coworkers. They can play a key role in the early stages of your crowdfunding campaign.
Once you start receiving funds, update your backers regularly about your progress to build trust and encourage continued support.
Final thoughts: What is crowdfunding? Everything you need to know
With crowdfunding, you can raise the money you need to start or grow your business without using traditional funding sources like bank loans or venture capital investors.
If you’re looking for a beautiful website to promote your fundraising campaigns, check out Bluehost’s web design and digital marketing services. Our experts can also help you create a digital marketing campaign that attracts the supporters you need.
Crowdfunding FAQs
Whether you need to pay back the funds depends on the type of crowdfunding you choose.
For example, in donation-based crowdfunding, donors give money without expecting anything in return, so there’s no need to repay. However, in debt-based crowdfunding, you receive a loan from a large number of people and must repay it with interest.
Crowdfunding is great for raising money for your business, especially if you can’t access bank loans and other traditional funding sources. Just ensure you pay attention to crowdfunding platform rules.
The main difference between Kickstarter and Indiegogo is the funding model.
Kickstarter operates on an “all-or-nothing” model. This means your project must meet its funding goal by the deadline to receive the pledged money.
Indiegogo offers both “all-or-nothing” and “flexible” funding options. The flexible funding allows you to keep the money you raise even if you don’t meet your goal.
