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What is Crowdfunding? Your Guide to Crowdfunding for Startups

May 21, 2019

9 Min Read
What is Crowdfunding
Reading Time: 9 minutes

What will you do when you can’t get investors to fund your business or you can’t reach out to them to pitch your startup? Unless you have pockets filled with cash, you don’t have many options left. That’s where funding from the masses comes in.

According to a recent report on Startups, around 50 percent of crowdfunded campaigns are successful. And, more than 75% of campaigns exceed their target goal.

Many startups have become successful after getting crowdfunded. And, this process of getting a small amount of cash from a lot of people to start a business venture is called as ‘crowdfunding’.

In this article, you will learn about crowdfunding and its types, ways to create a successful crowdfunding campaign, and raising capital from the general public the right way.

What is Crowdfunding?

“Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. It makes use of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together, and has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.” – Investopedia

How Crowdfunding Works?

The best part about crowdfunding is that companies take the money as an advanced booking of the product. This means the fundraising individuals get their products as soon as the company completes the production. If the company doesn’t reach its goal, the platform will return all the money to all the fund-raisers through an automated system.

All crowdfunding websites including Indiegogo, Kickstarter, Fundable, and Patreon offer this trusted system. And, this is what has led to an increase in crowdfunding in the last few years.

What makes it a more lucrative way to get funds instead of an investment or equity funding, is because most people will easily donate for advance booking of the products that the startup produces.

Let’s learn how crowdfunding has changed in the last few decades.

Learn about the major differences in startup funding stages

Crowdfunding for Starups in 2019

Crowdfunding in the pre-internet era was difficult because one person couldn’t trust another person with his money. But, ecommerce has changed all this. Now, people can fund any startup of their choice through sites like Kickstarter, Indiegogo, and fundable.

In fact, startups have earned more than $5 million through these crowdfunding websites. One product named ‘The Travel Line’ has gathered $5.2 million on Kickstarter from 13,700 fund providers in just two months.

Crowdfunding Statistics: Facts & Figures about Crowdfunding for Business

While planning crowdfunding for startups campaign, it is important to understand the actual facts and figures of this funding option. Here are some statistics for you to consider:

  • On average, a successful crowdfunding campaign is around $7,000

Majority of the crowdfunding campaigns have a target a fund goal between $50,000 and $100,000. While this amount is great and certainly helpful to keep the startup going for a year or so without any burden, this amount isn’t easier to get. In fact, most campaigns fail because they have a funding goal too big to achieve. However, as the world moves towards the cashless economy, experts assume that the crowdfunding campaigns with bigger goals are more likely to witness success in the upcoming years.

  • It usually takes 11 days to prepare a successful crowdfunding campaign

A decent crowdfunding campaign requires careful planning, strategy, design, layout, preparation of props and marketing collateral. All these require time and effort. Most campaigners start preparing a month ahead before taking their products to live on the crowdfunding websites. Because they will only get the limelight for the first three days. After that, the platform replaces those campaigns with more recent and attractive ones.

  • If a campaign gets 30% of its goal within the first week it is more likely to succeed

On most crowdfunding websites, campaigns that get at least 30% of the amount in the first week are more likely to remain on top. This gives them more prominence and gets their message across to the wider audience. But that is not always the case with campaigns that don’t get more than 30% funding in the first week. That is also a reason why successful campaigners shut down their campaigns and create a new one when they don’t get their desired funding in the first week or so.

  • On average, successful campaigns raise 40% of funds in the first three days of the campaign period

There is an element of urgency that most successful campaigners use to give their campaigns more limelight. This means sharing it on the platforms where they have a presence and creating messages that can arouse user interest. The purpose is to get more than 30% funding in the first week. This practice leads to the completion of the funding goal in the next month. However, if the campaign fails to achieve its goal, it will not get any money.

Crowdfunding stats

Kickstarter explaining its policy of fees on the official website.

Crowdfunding statistics - Quora

Kickstarter and other websites won’t charge the backers a single penny if the campaigns fail – Quora

  • The average amount for crowdfunding for business is $88

While backers can fund as much amount as they want to, but on average, the sent amount is $88 per campaign. A major reason behind it is because most backers are from the USA and Canada, the amount, therefore, is in either $50s or $100s and the average of all these amounts combined is around $88.

Types of Crowdfunding for Startups

There are many types of Crowdfunding for startups. From crowdfunding that helps with donations to equity-based crowdfunding that helps the backers earn more profit from it. The reason crowdfunding is so popular is because it is easy, secure, and accessible to everyone. Let’s learn about the types of crowdfunding in more detail.

1. Reward Based Crowdfunding

In reward-based crowdfunding, backers contribute to your project for non-financial benefits. This type of reward based funding is popular in creative projects where the backers will receive a token of appreciation or free gifts for funding the project. Sites like Kickstarter, Indiegogo and many others operate on this business model.

2. Donation Based Crowdfunding

Donation-based crowdfunding is for charities that are working for a social cause. One website that’s famous for donations is GoFundMe.

Users just create a cause and then distribute the link of the campaign among their peers. They set a goal and all the amount collected is sent to the account of the person who has created the campaign.

3. Equity-Based Crowdfunding

Equity-based crowdfunding is meant to get a return on the invested amount. It is popular among in the stock market where people buy shares of various stocks and redeem them when the prices rise.

It is also a great way for startups to get money for their initiative. But they will have to sign a contract that they will provide equity to the shareholders or return their money if the project fails.

4. Debt Crowdfunding

Debt crowdfunding is when backers provide money in exchange for interest or higher markup. The debt crowdfunding option is usually practiced by banks and lending companies.

Pros and Cons of Crowdfunding

Like any other funding campaign, crowdfunding also has its fair share of pros and cons. First, let’s discuss the pros of crowdfunding.

Pros of Crowdfunding

  • No-Risk Involved

One of the benefits of crowdfunding is that it doesn’t involve any risks. You simply have to create a compelling campaign and bring it in front of the public. If they like it, they will fund it. Moreover, your product automatically gets exposed to a lot of potential customers.

  • Get As Much Funding As You Desire

Another benefit of crowdfunding is that you can set a goal for your funding amount without paying any equity. This amount can range from $10,000 to $100,000. Since it is the public that is funding your product, you can either give them discount coupons or gift items after the project concludes.

  • Sell Products In Advance

Another great benefit of crowdfunding is that you can sell products in advance against the funding received. For example, your startup promises to sell bags with power banks. Now, each bag costs around $80. You can set a crowdfunding amount per user of $80 and you will give the bag as a gift to them. When you collect the funding amount, you can start shipping the bags to the users. This is how most campaigns on Kickstarter work.

Cons of Crowdfunding

  • Pressure Builds Up

You have to ship the products that you promise to the backers of your campaigns. If you don’t deliver the products on time, the backers are likely to complain to the authorities. Some of them can also file lawsuits.

  • No Payoff If Campaign Fails

There are chances that you will not get a single dollar if the campaign fails. This means all the efforts you put in the campaign will go down the drain. You should note that more than 60% of crowdfunding campaigns fail. Hence, if you want to save yours, then take inspiration from the following campaign examples.

Crowdfunding Examples to Take Some Inspiration

Here are some of the best crowdfunding examples that you can use to enhance your campaigns and increase their success ratio.

  1. Coolest Cooler Ever

Coolest Cooler example 1

There was this one campaign of a water cooler that can turn into a blender, music stereo, power bank, cutlery holder, etc. And guess what? This cooler is also named as the ‘coolest cooler.’ It garnered over $13 million in funding last year on Kickstarter and is now available in the market.

Why Was it Successful?

The reason it became so successful was that it offered people what they consider essential for outdoor tours including power banks, juicers, ice cooler, and much more – all in a single product.  The cherry on top is its marketing campaign that includes an attractive video advertisement. The best part is that it asked people to get the complete cooler with all perks by funding the $165 only.

  1. Everyday Backpack

Everyday Backpack example 2

This product has been so successful that all top news publications including The Guardian, Wall Street, Buzzfeed, Mashable, and many more have covered it.

It has gathered over $6 million in funding on Kickstarter. The product is made by photographers for everyday travelers who want comfort and style.

Why Was it Successful?

People love simple travel bags. The everyday bags are packed full of features and meticulously engineered. Besides, their promo video shows all the features in all their glory. That is one solid reason behind their success.

  1. VAVA 4K Laser Projector

VAVA 4K Laser Projector example 3

Think about watching movies in the cinema every day? Not possible right? But what if you can get the cinema-like experience right in your home. The VAVA 4K laser projector does exactly that. For a laser projector company that asked for $20,000 only, the total funding received was $564,908 or 2000% more than the actual amount.

Why Was it Successful?

As we said, everyone wants a cinema-like experience at home. And, when a small device that’s around a couple thousand dollars can provide the same experience to them, they will buy it. That is one reason it received over 2000% in funding. Most people actually bought the device in advance by paying the total price of the laser projector.

  1. Hush Iced: Sleep-Inducing Blanket

Hush Iced example 4

Are you someone who is suffering from sleep insomnia? If yes, then, you must fund the Hush iced blanket. And guess what? There are over 6,000 other Hush Iced backers that have done that and funded a total of $1,031,578.

Why Was it Successful?

Most people will prefer to spend their bucks on a product solves their problem. This is why people loved to buy Hush Iced Sleep Inducing Blanket. It received an enormous amount in funding. The blanket is available for $139. And, around 471 backers claimed these blankets alone. This means they paid around $139.

Ready to Launch Your Crowdfunding Campaign?

Crowdfunding for startups is great when a startup doesn’t have access to investors. They can simply launch a great campaign on a crowdfunding website and get funding from the public for their product.

But, there is a catch! Crowdfund isn’t there to sustain your business for the long-term. This means unlike equity-based funding, you can’t get crowdfunding again and again for the same product. Once you have the funds, make sure to make your business successful and deliver what you have promised the public against their money.

That’s it. We hope you are now familiar with crowdfunding campaigns, their types, and how they can help you raise funding in a short amount of time. If you are still unclear about one or more concepts we have discussed in this article, simply comment below.

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Arsalan Sajid

Arsalan, a Digital Marketer by profession, works as a Startup Community Manager at Cloudways. He loves all things entrepreneurial and wakes up every day with the desire to enable the dreams of aspiring entrepreneurs through his work!

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