Fri

21

Nov

2014

Everything You Ever Wanted to Know About Crowdfunding

A motorcycle helmet equipped with GPS. An independent film. And decorative canes designed by an 89-year-old woman. These three products may seem like they have nothing in common, but they all got their start the same way—as crowdfunding campaigns.

 

Is crowdfunding right for you?

 

Crowdfunding websites like Kickstarter and Indiegogo provide a platform for artists, designers, small business owners, and others to raise money online for projects or products—everything from theatrical performances to new inventions to medical bills. They’ve grown tremendously in recent years: according to a report from Massolution, crowdfunding websites raised $2.7 billion in 2012, an 81 percent increase from the previous year. And according to HiveWire, a crowdfunding solutions company based in Toronto, campaign pledges on Kickstarter and Indiegogo alone are projected to exceed $4.3 billion in 2015.

 

So what types of crowdfunding websites are out there? And how can you best use them to finance your next brilliant idea? Read on for answers.

 

What exactly is crowdfunding?

 

Crowdfunding is exactly what its name implies—sourcing small amounts of money from a large number of people. Instead of an entrepreneur providing the upfront capital to fund a new project or product, he or she creates a profile on a crowdfunding website. This attracts small pledges from lots of people, which, hopefully, amount to enough to collectively finance the venture.

 

What kinds of crowdfunding sites are out there and who can use them?

 

Crowdfunding has grown tremendously in recent years, and there are now hundreds of crowdfunding platforms on the internet. Virtually anyone with a project to finance—be it recording an album, starting a food truck, or paying a for a pet’s surgery—can find a crowdfunding site to accommodate.

 

Some crowdfunding websites are open to a very broad set of users—like Indiegogo and Rockethub, which allow any and all types of crowdfunding campaigns, or Kickstarter, which accepts campaigns from anyone looking to raise money to “create something to share with others.” Some sites are designed to raise money specifically for charitable causes, such as Causes, Crowdrise, or FirstGiving. Others are even more niche. FundOurCommunity, for example, is designed for people looking to fund a park, youth center, athletic league, or other community project. Experiment helps scientists raise money for research. And Beacon allows journalists to crowdfund writing and reporting projects.

 

Experiment crowdfunding site There's a crowdfunding site for almost everything nowadays, including Experiment, which helps fund scientific research.

 

How do crowdfunding sites work?

 

There are three models for crowdfunding sites, rewards-based, equity, and lending. We’ll cover rewards-based and equity sites here.

 

Reward sites, the most common type of crowdfunding platform, allow entrepreneurs to offer different incentives to supporters depending on their contribution levels. For example, say you’re raising money to create a new line of lip balms. A $1 pledge might earn a thank-you email; a $10 pledge might get supporters two lip balms of their choice; a $100 pledge might secure a lip balm named after the supporter. For some projects, the satisfaction of supporting a great cause is a user’s reward.

 

Most of these crowdfunding platforms take a small cut of the pledges for themselves—typically 4-9 percent, depending on the website, plus credit card processing fees.

 

The other model is the relatively new equity-based model. Equity sites allow entrepreneurs to attract investments in exchange for a cut of the profits or a share in the company. Right now, only accredited investors can support equity campaigns in the U.S. But if Title III of the U.S. Jumpstart Our Business Startups (JOBS) Act passes, all Americans can financially support equity campaigns. A few examples of equity crowdfunding sites include Crowdfunder, AngelList, Rock the Post, CircleUp, and Fundable.

 

What are the most popular crowdfunding sites?

 

Rewards-based crowdfunding sites are more popular than equity sites in terms of volume of users. Kickstarter is the leading rewards-based crowdfunding site, with supporters pledging nearly $1.4 billion and successfully funding more than 73,000 projects. Indiegogo attracts more than 15 million visitors every month.

 

Here’s a quick snapshot of how these two leading crowdfunding sites differ:

 

Kickstarter:

  • Only allows campaigns for “creative projects”—think music albums, photography, clothing, films, a line of baked goods, or new products. This is not the place for personal campaigns, such as raising money for medical bills or tuition.
  • Takes an “all-or-nothing” approach—campaigns must meet their full funding goal in order to receive money. Funding goals are set by the campaign creator, and supporters get their money back if a campaign fails to meet its goal.
  • Kickstarter takes 5 percent of all funding for successfully funded projects. There are no fees for projects that don’t meet their funding goal.

 

Indiegogo:

  • Accepts all kinds of campaigns—from artistic endeavors to personal finance campaigns to charitable causes.
  • Offers two pricing models, flexible and fixed. For the flexible model, entrepreneurs receive all funds pledged for their project. The site takes 4 percent from successfully funded projects, and 9 percent from campaigns that fail to meet their fundraising goal.
  • The fixed option is similar to Kickstarter’s “all-or-nothing” approach. Indiegogo takes 4 percent from projects meeting their fundraising target. Both entrepreneurs and Indiegogo receive no money from campaigns that fall short of their goal.

 

How often do projects actually get funded?

 

This varies significantly depending on the platform, and most platforms do not publicly disclose this data. But it’s fair to say that failure rates are high. According to crowdfunding campaign consulting firm Seeding Factory, failure rates are above 50 percent on any platform.

 

Kickstarter says that 44 percent of its campaigns have reached their fundraising goals, with the average successful campaign raising about $7,800. Some campaigns even exceed their fundraising goals. For example, Kickstarter’s most funded campaign of all time, the Coolest Cooler, attracted more than $13 million in pledges—far more than the creator’s $50,000 goal. The cooler boasts a built-in blender, Bluetooth speaker, and USB charger.

 

According to HiveWire, only about 9.8 percent of Indiegogo campaigns reach their fundraising goal.

 

How can I help my crowdfunding campaign succeed?

 

Follow a few tips to maximize your campaign profile on Kickstarter, Indiegogo, or another crowdfunding platform:

 

1. Have a good idea: This may seem simplistic, but it’s true. The most funded campaigns offer an innovative product or project. Ask yourself questions like, “What’s a problem people need a solution to?” For small businesses, this could be a new product, but it could also be a project—such as expanding a local restaurant to a new location.

 

2. Create a robust campaign profile: Do your homework, and make sure your “pitch” is professional. Create a budget and include it on your campaign page. Make sure your fundraising goal is high enough to cover your costs—after all, you will be expected to deliver to your supporters if your project is fully funded—but not so high that it’s unattainable. You’ll also want to factor in the 4-9 percent cut that crowdfunding sites take, as well as credit card processing fees.

 

Videos can also help sell your pitch. Seed Factory says that campaigns with a video pitch have much higher success rate than those without. According to Kickstarter, campaign pages with videos—even homemade videos on mobile devices—see a 50 percent success rate. Campaigns without videos see only a 30 percent success rate. The reason? People want to see the human face behind a campaign and connect to the real person behind it.

 

3. Market your project: It’s not enough to just build your campaign—you won’t attract backers unless you market it. Reach out to friends and family before your launch your campaign profile to attain a first-round of support. Build a following on social media sites like Facebook and Twitter, and promote your campaign page there. Email your contacts and other interested parties with your pitch. If your idea is particularly innovative, locally relevant, or getting a lot of attention, you can even send a note to media. Some entrepreneurs even build their own websites with their own domain names to promote both their idea and their crowdfunding campaign.

 

The founders of Somabar built a JimdoBusiness website to help support their Kickstarter project. Their campaign starts today, so be sure to check them out! The founders of Somabar built a JimdoBusiness website to help support their Kickstarter project. Their campaign starts today, so be sure to check them out!

 

4. Longer is not necessarily better: Expect to concentrate attention to your campaign over a relatively short time frame. Kickstarter says that the most successful projects last 30 days or fewer, even though the website allows campaigns to stay open for up to 60 days. That’s partly why laying the groundwork for your marketing campaign (see above) is so important.

 

5. Do your research: Spend some time analyzing successful campaigns on your crowdfunding platform of choice. What are the common trends among them? How can you apply these strategies to your own campaign? Many crowdfunding sites also offer online handbooks for campaign creators, and a simple Google search yields tons of additional articles with tips and tricks.

 

Now that you’re up to speed, it’s time to start attracting finance for your pet project. Who knows, you could just be the next Coolest Cooler!

 


Sarah Parsons

Sarah Parsons

 

Sarah is a freelance writer based in Silver Spring, MD. Her work has also appeared in Popular Science, Audubon, OnEarth, GOOD, Grist.org, Inhabitat.com, and several other publications. When she's not creating compelling online content, Sarah enjoys reading, cooking, watching bad reality TV, and pampering her dog, Clancy.