What is crowdfunding?
Crowdfunding is, at its most basic, raising money from a group of people. However, when we talk about crowdfunding these days, we're usually talking specifically about raising money online from a large group of people. Crowdfunding is a great option for people who don't want to or don't have the resources to get funding from traditional sources like banks or venture capitalists
There are three essential actors in a crowdfunding campaign:
- the person raising money (let's call them the "creator")
- the people or groups who support that person by donating money (the "backers")
- the crowdfunding platform (the "platform").
Sites like Kickstarter, IndieGoGo, and GoFundMe are all examples of popular crowdfunding platforms that you've probably heard of. That's where the crowdfunding magic - which we explain further down - happens.
There are a few different types of crowdfunding platforms, including rewards, donation, peer-to-peer, and equity crowdfunding.
Types of crowdfunding
Rewards crowdfunding offers some type of tangible reward, like a pre-sale of the object that the campaign is raising money for or an unrelated object or a service, like a piece of art or a massage. Rewards are offered in a tiered system, so the backer will get a different reward if she donates $5 than if she donates, say, $100. In a good campaign, the rewards will get "better" as the donated amount rises.
Examples of popular reward crowdfunding platforms include: Kickstarter, IndieGoGo, and RocketHub.
Donation crowdfunding doesn't offer any kind of reward to the backer - these are people who are giving to a worthy cause out of the goodness of their hearts. They may get a tax receipt, but that's really it.
Examples of popular donation crowdfunding platforms include: GoFundMe, Fundly, and DonorsChoose.
Another term for equity crowdfunding is "investment crowdfunding because not all investments come in the form of equity (i.e. owning stock in a company). For example, a company could crowdfund an investment that gets repaid like a loan. Whether it's debt or equity, investment crowdfunding offers investors some kind of financial return for their initial financial contribution to a business.
Examples of investment crowdfunding platforms: Milk Money, SeedInvest, WeFunder, Fundable
If you'd like more information about the other types of crowdfunding platforms, check out this great post from Crowdfunding Strategy & Information.
How do I choose a crowdfunding platform?
There are two types of rewards and donation crowdfunding platforms:
- Keep-it-all: you get to keep however much you raise, even if it doesn't even come close to your financing goal. Examples of popular keep-it-all platforms platforms include: RocketHub, Fundable, CrowdRise.
- All-or-nothing: you have to meet the goal you set at the beginning of the campaign - in which case you get all of the money raised - or go home with nothing. An example of an all-or-nothing platforms is: Kickstarter.
Some examples of platforms with both are: IndieGoGo, GoFundMe, Fundly.
There are a few other things to consider when you're choosing which platform will work best for your project.
Do they support your type of project? Every platform has rules about what types of projects can raise funds with them. For example, Kickstarter is really clear about the fact that you can't raise money for any kind of charity or cause, whereas GoFundMe is totally down with charities. So before you even get started, just make sure that the site will let you on in the first place.
Check out this infographic from our friends at Wrike for a breakdown of which types of businesses and organizations different platforms serve.
Look at what fees each platform charges. It's usually a pretty low number, ranging from none at all to around 7% of the total raised, but some sites do take a hefty, hefty set fee. It's worth it to know beforehand just to make sure you're not slammed with a massive fee at the end of your campaign.
Make sure that the platform resonates with you. It's a good idea to spend a little time exploring the site and seeing if you could picture your project there. Do you like the types of projects you're seeing? Do you enjoy interacting with it? You're going to be spending a lot of time on whatever platform you choose, so make sure it's a place that you actually want to be.