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What is crowdfunding in business? Using small amounts of capital from a large number of individuals to fund a new business venture is called crowdfunding?
Crowdfunding allows large networks of people to connect with entrepreneurs and investors via social media and crowdfunding websites, with the potential to keep entrepreneurship alive by attracting investors beyond the traditional circle of owners, relatives, and venture capitalists.
Key Takeaways
- New businesses are restricted in who can fund them and how much they can contribute.
- Many crowdfunding projects are open to $10 investments.
- Sites that aid in fundraising receive a percentage of the proceeds raised.
- United States equity crowdfunding is regulated by the SEC.
- Some of the most popular crowdfunding platforms include Kickstarter, Indiegogo, and GoFundMe.
How Crowdfunding Works
In most jurisdictions, a new business is restricted in how much funding it can receive and how much they can contribute. A hedge fund is regulated to prevent unsophisticated or non-wealthy investors from putting their savings at risk. New businesses are highly likely to fail, which puts their investors at high risk.
Entrepreneurs can raise hundreds of thousands of dollars or even millions through crowdsourcing. Using crowdsourcing, any business idea can be pitched to investors.
For example, a new potato salad recipe was developed using crowdfunding. More than $55,000 was raised from 6,911 contributors, exceeding his fundraising goal of $10. Dozens of projects were funded. Funds were distributed to the fundraising sites.
Types of Crowdfunding
The term is traditionally used to refer to start-up companies seeking to launch products or services into the market, as well as individuals in need of financial support. People with expensive medical bills, those affected by natural disasters, and others have gained financial assistance through crowdfunding platforms that they otherwise wouldn’t have access to.
Through crowdfunding platforms like Patreon and Substack, creative types, such as writers, musicians, and podcasters, can receive a steady income.
Popular Crowdfunding Websites
Many people use crowdfunding websites such as Kickstarter, Indiegogo, and GoFundMe to create or support the next big thing.
GoFundMe
It is predicted that GoFundMe will become the biggest crowdfunding platform by 2021. Since its creation in 2010, GoFundMe has received more than 150 million donations. A natural disaster, medical emergency or house fire is the most common reason for using GoFundMe. Some startups use Kickstarter.
Kickstarter
Kickstarter is another popular option. Over $5.7 billion has been pledged to Kickstarter projects since the platform’s founding in 2009, with over 200,000 projects funded to date.
An aspiring business can raise capital and reach a broad audience through the crowdfunding site Kickstarter. As opposed to GoFundMe, Kickstarter allows users to create projects they can share with others.
Neither Kickstarter nor its projects can solicit donations to charitable organizations or causes, nor may Kickstarter projects offer equity, revenue sharing, or investment opportunities, nor can they participate in any of the prohibited items listed on Kickstarter’s website, such as items that claim to diagnose, treat, or prevent illnesses, political fundraising, drugs, or alcohol as well as contests, coupons, or games.3.
Indiegogo
One year after Indiegogo was launched, it began accepting projects from all categories, rather than just independent films.
Indiegogo offers backers the option of choosing between fixed and flexible models, making the platform a less restrictive one than Kickstarter. Indiegogo offers flexible funding rates while Kickstarter does not. As opposed to Kickstarter, Indiegogo allows campaigners to receive funding based on the amount raised.
If you are running a campaign, it may be easier and less risky to use flexible funding (i.e., accepting funds as they come in). However, you must meet all promises made no matter how much you receive. The fixed funding method is more attractive to investors since it is less risky.
Crowdfunding platforms typically charge between 5% and 12% in fees. Before using a crowdfunding platform, look for punitive fees.
Advantages and Disadvantages of Crowdfunding
One of the biggest advantages of crowdfunding for start-up companies or individuals is the ability to access a large and diverse crowd of investors. Crowdfunding platforms are an incredible way for businesses and individuals to gain new audience members as well as receive the funding they need, thanks to the ubiquity of social media.
As well as, many crowdfunding projects offer rewards; investors can participate in the launch of a new product and receive a gift as part of their investment. An investor who buys a new soap made from bacon fat might get one free bar as a token of appreciation. Video games are among the most popular crowdfunding investments among gamers because of the chance to receive advance copies of the game as a reward.
Startup companies benefit from equity crowdfunding because it allows them to raise funds without giving up control over their business to venture capitalists. Sometimes it also offers equity positions to investors. Investing in equity-based crowdfunding is regulated by the Securities and Exchange Commission (SEC).
Among the potential disadvantages of crowdfunding are the damage to your or your company’s reputation you may suffer if you “resort” to crowdfunding, the fees associated with the crowdfunding site, and, at least on some platforms, if you do not reach your funding goal, any pledged funds will be returned to the investors.
Funding otherwise unavailable through traditional sources
- An excellent method of interacting with consumers
- A good way to gauge consumer opinion
Must adhere to crowdfunding platform rules and fees
- Any pledged capital will, in some cases, be returned to your investors if you do not reach your fundraising goal
- Reputation damage for your start-up business
Examples of Crowdfunding
Kickstarter has been a very successful platform where entrepreneurs have crowdfunded successful products and businesses. Oculus VR, an American maker of virtual reality hardware and software products, was founded on the site, for example. The founder of VR gaming headset maker Palmer Luckey launched a Kickstarter campaign in 2012 to raise money for creating virtual reality headsets for video games. Crowdfunding raised $2.4 million, ten times the original goal4 In March 2014, Facebook (FB), now Meta, acquired Oculus VR for $2.3 billion.
M3D, a 3D printer manufacturing company founded by two friends, is another company that has achieved success thanks to Kickstarter campaigns. In 2014, David Jones and Michael Armani successfully raised over $3 million for their Micro 3D printer on Kickstarter.6 The tiny printer includes 3D inks for printing durable objects and is now sold at Staples, Amazon.com, Inc. (AMZN), Brookstone, and elsewhere.
It was reported that Critical Role, the weekly live-streamed tabletop roleplaying game featuring a group of distinguished voice actors, raised $4.7 million in just 24 hours for its latest animated special “The Legend of Vox Machina.” No other Kickstarter campaign in 2019 raised this amount during the entire 30- to the 60-day campaign period.
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