The Basic Idea
Crowdfunding means gathering small amounts of money from many people, usually through an online platform, to support a project or business. Instead of persuading one lender or investor, you make your case to the public. This article describes the approach in general terms. Rules for crowd-based fundraising, especially anything involving financial returns, vary by place and can be complicated, so it is wise to consult a qualified professional before launching.
Common Models
Reward-based
Backers give money and receive something in return, such as the finished product, an early version, a thank-you or an experience. They do not receive ownership or interest. This is the model most people picture. Because backers are effectively pre-ordering, it can double as a test of demand.
Donation-based
Supporters give without expecting a reward, often for a cause, community project or personal need. It tends to rely on a compelling story and a strong personal network.
Lending-based
Many individuals each lend a small amount, which is repaid, often with interest. This is regulated in many places and works like business loans in that repayment is owed.
Equity-based
Backers receive a small ownership stake. This brings the same questions as any equity investment, such as dilution and control, along with extra legal requirements in many regions.
Which of these exist, and under what rules, depends on where you live.
What a Campaign Asks of You
A common misunderstanding is that you post a page and money arrives. In practice, most of the work happens before and during the campaign:
- Preparation. You need a clear description of the project, a realistic budget, a fundraising goal, a timeline and often a video or images. Good product descriptions that are honest and specific help build trust.
- An existing audience. Campaigns often depend on friends, family, customers and followers who are ready to back on day one. Building this audience through email marketing and social media usually starts well before launch.
- Daily promotion. Updates, replies to questions and outreach continue throughout the campaign. Even small campaigns can feel like a full-time job for a few weeks.
- Fulfillment. After the money comes in, you must deliver what you promised, often to many people in many places, with shipping, manufacturing and customer service demands.
Because of these demands, it helps to think about order fulfillment and supplier costs at the start, not after funding.
Setting a Goal
Many platforms use an all-or-nothing approach, where you receive funds only if the goal is reached, while others let you keep what you raise. In either case, set the goal from your real costs, not wishful thinking. Include:
- Production or development costs
- Shipping and packaging
- Platform and payment fees, which typically take a percentage
- Taxes that may apply to the funds you receive
- A buffer for delays and price changes
A goal that covers only part of the true cost can leave you obligated to deliver without the money to do it. As a hypothetical example, if a campaign raises $20,000 and fees and costs total $22,000, the project is short by $2,000 before any problems arise. Do the arithmetic early, and be cautious with estimates.
Risks and Downsides
- Not reaching the goal. Many campaigns fall short, and there is no guarantee that interest will appear.
- Public exposure. Your idea and your results are visible to everyone, including competitors.
- Delivery pressure. Delays or quality problems can upset backers, and some places have consumer protection rules about unfulfilled promises.
- Underpricing. Offering deep discounts to attract backers can leave thin margins. Understanding your profit margin before setting reward prices is important.
- Misleading claims. Overstating what a product can do is both unethical and potentially unlawful.
Is It a Good Fit?
Crowdfunding tends to suit ideas that are easy to explain, appeal to an identifiable group and can be shown visually. It suits a project with a clear end, like making a first production run. It is less suited to ongoing operating costs or to businesses that cannot tell a simple story.
Before committing, test interest in small ways. Talk to potential customers, gather a waiting list and look for signs people would pay. Crowdfunding can supplement other funding options, but it should not be the only plan. Outcomes vary greatly, and a campaign is a promise to deliver, not just a way to raise money.