Crowdfunding Defined: What You Need to Know

May 1, 2014

At its core crowdfunding is capital formation and equity investments on the internet. The once obscure , difficult to obtain investment capital that so many businesses need to grow is now readily available to anyone with an email address and PayPal account.

 

According to the Crowdfunding Industry Report by Massolution published in 2013– the overall industry raised $2.7 Billion in 2012 across more than 1 Million individual campaigns globally which represents a 64% annual growth in 2011 and 81% annual growth in 2012. The figures for 2013 were more than $5 Billion and growth is expected to hit more than $6B in 2014.

 

Crowdfunding was born in April of 2012 when President Obama signed the Jumpstart Our Businesses Act also known as the JOBS Act. This legislation gave way to the democratization of investment capital for small businesses in the name of creating jobs to fuel our economy. The legislation was hotly contested by the financial industry giants that see their highly regulated money markets as being threatened by open access to the once mysterious industry. Despite the claims of doom and failure, the market bells are still ringing on Wall street, traders are still trading, and Main Street America has not turned its back on this incredible opportunity to finance its dreams.

 

Crowdfunding Models:

Donation: The donation model is predicated upon a straight gift where no return or a non-financial return to the donor.

 

Reward: The funder contributes toward the collaborative goal in return for products, rewards or perks. It may be a prelaunch product, special edition of a product, or the actual item that the company is raising funds to produce. Indiegogo

 

Equity Investment: This model is where businesses seeking investment sell ownership stakes in the form of equity or debt via the online funding platform. This differs from the donation model in that funders and fans become actual owners of the business and stand to win when the company wins. 

 

Lending: In this model funders invest in microloans to entrepreneurs with the expectation that the loan will be repaid with some amount of interest. The most popular in this category is kiva.

 

Crowdfunding Platforms

While there are over 100 crowdfunding websites operating across the globe, we only list the top 5 websites because what matters is not how many there are but how right each one is for your project. Picking the platform is a critical component for success but equally as important is your level of preparation, following best practices, the size of your team, and the value of your message.

 

1. Kickstarter – mostly for creative projects raising donation-based funding. They have a handy guide called Kickstarter School that is useful in getting ideas and seeing what others have done. This is an all or nothing platform so if you don’t reach your goal, you don’t get any money at all.

 

2. Indiegogo is perhaps the most flexible of all the platforms because they allow you to get your funds no matter how much your campaign raises. If you reach your goal you pay only 5% to the platform while you pay 9% if you fall short. A broad range of projects are allowed here and is the platform of choice for donation based campaigns. Lots of helpful information can be found in the Indiegogo Playbook

 

3. Crowdfunder is a subscription based platform that markets primarily to businesses. It charges between $99 and $999 per month to establish your campaign and raise the capital you are seeking. This is not for startups that are still in inception stage. Campaigns here are for those startups that need seed stage, series A & series B funding. These guys understand the startup lifecycles and have developed a platform to meet the needs of entrepreneurs and investors around the world. 

 

4. RocketHub has gone commercial with their platform by partnering with the Arts & Entertainment Television Network, A&E. Telling a fundraiser’s story is t the heart of any successful crowdfunding campaign and Rocket Hub has partnered with the best in the business when it comes to storytelling. This collaboration, called project startup, offers mass appeal and reach that most small entrepreneurs could not afford for their creative projects. This donation based platform offers the first ever television network to be involved in the crowdfunding movement. With their Success School, entrepreneurs can get what they need in a step-by-step breakdown of the entire process.

 

5. Crowdrise is all about the cause and is the place for those doing work in communities across the world. For mission driven non-profits that have a clear message and a mark they are making in the world this is the platform. They call their events fundraisers like most of the non-profit community instead of campaigns and they seek to promote fundraisers for civil rights to human rights to the environment and beyond. Most recently they promoted a fundraiser for the Boston Medical Center whose Emergency Department was responsible for first response to the Boston Marathon tragedy of 2013. They raised over 1 million on this platform in April 2014.

 

As you can see, crowdfunding can yield big bucks for those that take it seriously and prepare for their campaigns properly. In our next blog we will look at what crowdfunding means to small businesses and talk about building your team for crowdfunding success.

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