Crowdfunding 101: What It is, Why it Matters, and How to Choose the Right Platform

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Crowdfunding 101

Crowdfunding is a phrase we’re hearing more and more, so we thought it would make sense to do a post on the who, what, where, when, and why around this popular topic. Let’s get to it.

What, exactly, is crowdfunding?
One of the best visual examples we can offer is this: you know that scene at the end of the classic film It’s a Wonderful Life where all of George Bailey’s friends and family show up at his house on Christmas Eve and offer money (thanks to a call made by George’s wife) to help save him from the evil Mr. Potter? That’s crowdfunding at work.

Crowdfunding is when a group of people collectively pool their money to support a specific endeavor. It could be a business endeavor (e.g. funding the manufacturing of a new product), a creative endeavor (funding a film), or charitable endeavor (funding a nonprofit’s specific need, like a new roof on a soup kitchen). Monetary donations can range from small, like one dollar, all the way up into the thousands.

On crowdfunding sites like Kickstarter, the person or organization creating the campaign sets a monetary goal and deadline (such as one month). If the monetary goal is met, the endeavor (whatever it is) moves forward. If the monetary goal isn’t met, then the endeavor *usually* doesn’t happen (and donors aren’t charged). The crowdfunding site *usually* gets a percentage of the funds raised IF the campaign is successfully funded and moves forward. We say “usually” because other crowdfunding platforms do exist that employ different models, such as a personal “stake” in the venture in exchange for funds. Bottom line: before choosing a crowdfunding platform, it’s important to understand the model it’s using. Always read the fine print.

Does crowdfunding work?
Yes and no. For every successful crowdfunding story you can find, you’ll be able to find plenty of others that failed. But when it does work, it can often work spectacularly, and those are the stories you’ll likely hear about in the news. For example, Rob Thomas, the creator of the cult favorite TV show Veronica Mars, launched a Kickstarter campaign in March. The goal? To raise two million dollars in order to turn the show into a movie, and, in doing so, convince movie executives that fans would be interested in seeing Veronica Mars on the silver screen. The campaign exceeded the goal within 48 hours and raised nearly four million dollars in two weeks. This shows the collective power a “crowd” of people can have.

But let’s talk statistics since those tend to be more telling than one over-the-top success story. According to The Economist, “Last year more than 18,000 projects were successfully funded on Kickstarter, the largest crowdfunding website. A total of $320m was pledged by 2.2m people, making possible creative projects including a documentary on fracking, a home aquaponics kit and a community centre for circus arts.” The article goes on to report that of the projects launched, 44 percent successfully raised the money they requested. As we head into the halfway point of 2013, crowdfunding is showing no signs of slowing down, with some predicting over three billion dollars will be raised this year.

OK, so how does crowdfunding work?
There are many crowdfunding sites out there. While the process might vary slightly from site to site, it typically goes like this:

  1. You have a project you need funded.
  2. You create an account on the crowdfunding site you’ve selected.
  3. You create a profile for your campaign, which describes the project, the costs, the perks, the deadlines, and any other pertinent information.
  4. You launch your campaign, promote it, and see what happens.

That’s the simplified version. The first and second steps will be more involved. First, you need a clear vision of your own campaign and how much money you want to raise. It’s important to be realistic. Second, the more interesting, engaging, and exciting your campaign is, the better chance you have of getting people on board. So how do you make a campaign sound exciting?

  • You create a compelling profile. You might accomplish this by writing a compelling story, creating a pitch video (most people will say this is essential), posting images, or some combination of all three.
  • You offer rewards or perks for different monetary donations. So if you’re funding a film, you might offer promotional T-shirts (like the one pictured promotional t-shirtsfrom Amsterdam Printing) for the $100 pledge level and a limited number of signed posters for the $500 level. For big-time spenders, you might offer a trip to the city where the movie will premiere along with a meet-and-greet with cast members. You get the idea. That said, you need to be smart about these rewards. Remember, if your campaign gets funded, you need to fulfill these rewards, and depending on how many or how involved the rewards are, this could take time and possibly more money than you had anticipated (don’t forget shipping costs! This is easy for people to overlook). Plan accordingly, and make sure you consider the cost of the reward items when you’re creating your campaign.

Like any other marketing campaign, you need to get the word out and promote it. Just because you build it, it doesn’t mean people will come. Promote your campaign by announcing it on social media and encouraging people to share it, by adding links in email signatures, by reaching out to your email database, by letting your best customers/members know about it, and so forth.

The pros seem obvious, but are there any cons?
Yes. You could put all sorts of time and effort into creating a campaign, only to see it fail. You could see your campaign successfully funded, but you might flounder when it comes to all the fulfillment pieces because you hadn’t thought through all that was involved (see above), leaving you in the red. Read this honest and insightful story about one self-published author’s Kickstarter experience.

How could a small-to-medium-sized business or charitable organization use crowdfunding?
Let’s brainstorm some examples. Perhaps you own a salon and spa and you want to develop your own line of nail polish. A crowdfunding campaign could help bring this idea to life. Or maybe you’re a business consultant and you have a book series and you want to create a compelling book trailer that you can use to promote the series. A crowdfunding campaign could help with the cost of video production. Or maybe you’re the leader of a church youth group that needs to raise funds to send members to Haiti to build homes with Habitat for Humanity. A crowdfunding campaign could help accomplish this goal. You get the idea. There are a variety of ways smaller businesses, solo entrepreneurs, and charitable organizations can use crowdfunding platforms. In fact, crowdfunding exists to promote these sorts of “smaller” projects. Another interesting note: angel groups are starting to turn to crowdfunding sites to learn about ventures they’d like to invest in and support.

Do you have other resources to share?
Of course! Here are some good articles to check out:

Have you ever pledged a crowdfunded project, or have you ever created your own campaign? Share your experience in the comments.

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