In this article, you will learn:
What is Crowdfunding?
According to Investopedia, crowdfunding is a financing method that calls for small amounts of contribution from a large number of people to build a business venture. Instead of looking out for investors or taking significant amount of money from a small group of individuals, the process of crowdfunding takes small amount of capital from a much larger pool of individuals.
The contributions from individuals can range from as low as $1 to thousands and millions of dollars too, it remains on the discretion of the individual.
History of crowdfunding
While the term crowdfunding was coined only a few decades ago, the concept is rather old. For centuries, books have been crowdfunded by publishers and authors. Michael Sullivan coined the name ‘crowdfunding’ in 2006 to start a fundraiser for the video blogging community.
When the term is broken down, it becomes crowd funding, which is self-explanatory.
European crowdfunding revenue per year is $6.48 billion.
Why crowdfunding has become popular recently
In the recent history, crowdfunding began when Marillion, a British rock band did not have enough money to do their US tour and raised $60,000 with the help of their fans. Their act served as the basis of the modern-day crowdfunding websites.
The band challenged the status quo and instead of depending on investors and banks to give them loans, took the matter in their owns and had a successful tour in the US. This gave idea to businesses who did not have the funding or capital to launch a new product or take a new initiative.
Before crowdfunding, the only way a new startup or business could be launched in the market was if the individual had enough capital on his own or had investors to do so.
Taking loans from the banks was also a popular option but not an ideal one (as it comes with interest which only increases with passing years). Crowdfunding, on the other hand, provided individuals with an unprecedented opportunity to get funds for their products by asking the potential customers and fans to fund them.
It is expected that crowdfunding will be valued at $28.8 billion by 2025. It is not just a co-incident that crowdfunding has gained so much popularity recently rather there a number of reasons behind it. Let’s take a look:
1. Generate more revenue with less risk
Because of crowdfunding, you can start generating revenue even before you launch your product. All thanks to presales, now you can easily generate enough revenue beforehand to use it for building your products.
The biggest hindrance in launching a new product for any individual is the fear that it will fail. But with crowdfunding, you get to say goodbye to the fear. When people start to place pre-orders and show interest in the product before its launch, it reduces the risk significantly and makes you confident about it.
2. More word out about your product
Typically, after you have built a product (be it a software or product), you can only market it once the product is in its perfect form. Even then, the marketing process is not easy or happens in a fortnight. Getting word out is the most crucial thing in the success of a new product. With a crowdfunded campaign, this issue gets sorted out on its own.
As crowdfunding has expanded over the years and thousands of people are now contributors, it becomes easy to make some noise if your product is worth it. Most of the successful crowdfunded product launches exceeded their original goals because they stirred enough interest in people.
Popular digital tech magazines and websites will also feature your product for free if you are actually solving a problem that people have or filling a gap in the market.
3. Earn more with cross-selling & upselling
Don’t know what cross-selling and upselling are?
Cross-selling is a popular selling technique used to convince customers in buying complementary products with the original once. For instance, if you have a CRM, you might also ask them to try your analytics software too (possibly at a discounted rate).
Upselling is when you persuade the customer to buy a more expensive version of the product they originally intended to. For instance, if a customer is buying hosting plan for a year, you might ask them to upsell it and get it for two years
In reward-based crowdfunding campaigns, the opportunity to earn by cross-selling, upselling and package deals increases significantly.
Campaigns that offer perks raise 143% more than those which don’t (for reward/equity campaigns).
How crowdfunding works
In today’s world, crowdfunding is one of the most common ways using which individuals launch their products and new ventures.
Wondering about how crowdfunding works?
Crowdfunding can be done in a number of ways. Here, we have covered three of the most popular types of crowdfunding:
- Reward-based crowdfunding
- Equity-based crowdfunding
- Donation-based crowdfunding
- Peer-to-peer lending
Reward-based crowdfunding
Reward-based crowdfunding is the most popular type of crowdfunding in today’s time. In this type, individuals from anywhere in the world promise to pay money in exchange of getting a particular package deal or benefit. Let’s take an example of company A, a digital agency, to understand this concept better. Company A starts a reward-based crowdfunding campaign and offers different tier of rewards on basis of contributions. It might look something like this:
- $100: One-year hosting free with complete website design
- $200: One-year hosting free, website design and social media setup
- $300: Two-year hosting free, website design, social media setup and strategy
Depending on the amount of money a person pledges, they will get the reward.
Equity-based crowdfunding
Evident by its name, in equity-based crowdfunding – investors get equity (a certain control of the company/product) in exchange of his/her investment. In other words, the contributors/investors in this type of crowdfunding get to have shares in the company or product being launched. The investors become partial owners of the project and share the risks and rewards with the original owner.
A number of companies have been launched in the market, using this method and they have been successful.
Donation-based crowdfunding
In this crowdfunding method, individuals donate money to the project without getting any reward or monetary benefits in return, hence the name donation-based crowdfunding.
Typically, individuals use donation-based crowdfunding for charitable causes, for example, raising money for sick kids, raising money for people who cannot afford treatment for terminal diseases etc.
Peer-to-peer lending
This is the most different crowdfunding method. Instead of individuals giving money to get a reward in return or have a share in the company, they lend money to the project. The catch here is that the conditions applied on this type of loan are vastly different than the loans given by banks and financial firms.
Successful Crowdfunding Projects
It is interesting to note here that while crowdfunding is a relatively new form of launching a business/product than traditional investment channels, it has helped launch million-dollar businesses since it first went mainstream.
Here we have listed some of the most popular crowdfunded projects that went onto become gigantic over time.
Oculus Virtual Reality Headset
Let’s start from the top: Oculus has been purchased by Facebook for $2 billion. What started merely as a side project by Palmer Luckey in his parents’ garage went onto become such a huge success. Luckey was interested in virtual reality since he was 15. While attending his community college, he started a Kickstarter campaign for his VR headset. In 2012, the campaign surpassed its original goal of raising $250,000 and raised $2.4 million instead. The headset was still a prototype when Facebook purchased it in 2014.
SkyBell Video Doorbell
Andrew Thomas along with a cofounder launched SkyBell campaign on Indiegogo while he was working as a full-time marketing consultant. SkyBell is a smart video doorbell, it sends live video of the homeowner’s front door to their smartphone. Security and privacy have become most important for all individuals and SkyBell provided just that. In merely a 30-days campaign, SkyBell was able to raise $600,000. In just a matter of few days, SkyBell was featured on credible sites such as TechCrunch and Engadget. Currently, SkyBell is considered one of the most successful smart home products in the market.
Tile App Locator
The co-founders of Tile were working full time when they first launched the Tile campaign on Kickstarter. The idea behind the app was that a Bluetooth-connected device can aid people in looking for the most-commonly placed items such as phone, car keys, home keys etc. The original goal of the campaign was surpassed merely 24 hours after its launch, raising more than $200,000. Before the campaign ended, they had a total of $2.6 million by contributors. Today, Tile is a massively successful application.
Pebble Wearable Devices
Pebble was a side project of Erick Migicovsky. While he was on a study abroad program in the University of Waterloo, he started a Kickstarter project for Pebble. Pebble contributed significantly in making IoT devices popular and more common than they were originally. On its first day of campaign launch, Pebble raised more than $10 million from 69,000 individuals on Kickstarter surpassing its original goal of $100,000.
Bragi Wireless Headphones
Nickolaj Hviid was working in the capacity of CEO of a design agency when he started this side project. He was able to raise $3.4 million for the crowdfunding campaign of Bragi. The startup became a multi-million dollar business overnight.
Best crowdfunding platforms
If you do a basic google search on crowdfunding platforms, you will be bombarded by hundreds of options. All of them promising to be the best out there and delivering exactly what they claim. But evidently not all crowdfunding websites are equal. While some are still in their initial phases, others have coined a great name for themselves in the industry and are seen as some of the best sites to crowdfund your next project or idea.
Here we have compiled a brief list of three of the best crowdfunding websites to get started:
Kickstarter
Kickstarter is one of the most popular and commonly-used websites when it comes to crowdfunding projects. One reason is that it was one of the pioneers in this field which earned it no-competition advantage and secondly because it has a highly successfully record of crowdfunding projects and making them a hit, literally overnight.
As Kickstarter has a huge audience, your project has the opportunity to attract thousands of people around the globe to get funds from. The biggest crowdfunding campaign of Kickstarter happened in 2015 for The Pebble Time Smartwatch. The campaign raised over $20.3 million from more than 78,000 people.
The mantra of Kickstarter is very simple: All or Nothing. It means that contributors will not be a charged a single dollar unless the campaign has reached/surpassed its goal. The reason behind this is mentioned on the website, “If a project doesn’t reach its funding goal, creators will not be expected to complete their project without the funds necessary to do so, and backers will not be charged”.
How Kickstarter works
5% of the overall funds are charged by the website while 3-5% of the funds are used as transaction fees. The crowdfunders are asked to only submit creative projects, which are approved before the campaign begins for the general public.
If you are planning to start a crowdfunding campaign on Kickstarter, here are the steps you should be following:
- Kickstart profile: The first step is to create a Kickstarter profile. The account will be set up in merely 30 seconds. You can either make a personal account or a company profile, depends on you.
- Image: The image of your product is the most important aspect of your project. It will act like the first impression of your project. Choose an image that is attractive and tells the viewers what it is about.
- Title: It is recommended that the title is self-explanatory and has the right keywords to hit your intended audience.
- Setting up funding goal: The goal should be set smartly; you should be able to cover the costs and also offer the rewards to contributors. Also be aware about the 20% threshold. According to stats, every Kickstarter project has a 56% chance of failing. But if your project is funded 20%, the chance of failing decreases by 11.3%.
- Setting up project deadline: The maximum duration for a Kickstarter project is 60 days. But this does not mean you should prolong your campaign for 60 days. Rather, according to Kickstarter, projects that last 30 or less days are more likely to reach their goal.
- How to set up rewards: Kickstarter offers three types of rewards:
- The most popular pledge amount is $25 but according to Kickstarter, the best way forward is to have at least once reward less than $20.
- While setting rewards, be precise and clear so that viewers can easily understand.
- Offer an ‘early bird’ reward to get more traction from contributors. Pebble also used this strategy and offered a certain number of watches for merely $99.
- Offering deals for bulk buying while setting rewards will help you in reaching your goal quickly. For instance, if you are selling CRM and Analytics software independently, they might be priced at $100 each but if a contributor buys them together, they can get them at $150.
- Offering premium or limited-time rewards is also a great option. You can ask contributors to pledge certain amount of money in return of access to beta version of a software or prototype of a product.
- Make a video: According to Kickstarter, projects that have videos have a much higher chance of getting funding than those who don’t have a video. Ideally, your video should give all the reasons to your intended audience about why they should pledge money. It can be a professionally produced video or made at home. Just keep in mind to give a clear and message along with a personal story behind creating it. Here are some of the points you should remember:
- Start with a personal note
- Tell your story
- Summarize the project in crisp words
- Talk about the features, and benefits from the contributor’s point of view
- Conclude the video with a clear CTA
- Writing description: You have this entire place to tell contributors everything about your project. There is no time or space limit so you are free to give as much details as possible. Think of the description box as a sales letter and a one-time chance to persuade the viewers to pledge their hard-earned money into your project.
Indiegogo
Indiegogo is another popular name in the world of crowdfunding. One of the most popular campaigns on Indiegogo was The Flow Hive. It was started by a father and son duo in 2015 to build an innovative new beehive. They were able to raise over $14.9 million from more than 40,000 individuals.
Just like Kickstarter, Indiegogo also has a huge audience, from all over the world. When you launch a campaign there, you get to take advantage of their name and audience.
The mantra of Indiegogo is simple: flexible rewards-based crowdfunding. This means that even if your campaign does not reach its goal, you will still be able to keep the raised funds.
How Indiegogo works
There is no application process for Indiegogo, which is unlike Kickstarter. 5% of the raised campaign funds are charged by the website along with a transaction fees of additional 3% + 30 cents.
If you are planning to start a crowdfunding campaign on Indiegogo, here are the steps you should be following:
- Title: The title of the campaign needs to be self-explanatory. According to the dos mentioned on Indiegogo website, be simple yet spark interest from the viewers.
- Tagline: The tagline, just like title, is very important. Both of them act like your first impressions and should be taken as such. According to Indiegogo website:
- Do not repeat the campaign title in tagline
- Do not user technical terms that are not well-known
- Use relevant keywords
- Have a clear CTA
- Campaign card image: This is the image that along with title and tagline are here to grab the attention of viewers, and potential contributors of your campaign. Choose a campaign card that clearly tells what your product is about and is attractive enough to stand out among its peers. According to Indiegogo website:
- Do not overload the card with too much text
- Do not zoom out/zoom in too much
- Do not add too many visual elements
- Use color
- Use the right context while showing your idea/product
- Use a close-up photo of the product
- Choosing the right funding type: Indiegogo offers two funding types to its crowdfunders:
- Flexible: When you choose this type, you get to keep the funds raised even if you fail to reach the goal. This is a good option for entrepreneurs who can get started even with lesser funds than their goal. The downside of this can be that you’d have to fulfill the rewards you promised to the contributors even if you could not raise enough money.
- Fixed: Fixed funding follows the all or nothing model. If you reach your campaign goal, you get to keep all the funds but if you are unable to reach the goal, you will not get anything. All the funds will be returned back to the contributors in case of failure to reach the goal. It is motivating for funders as they can be ensured that if the campaign wouldn’t reach its objective, their money will be given back to them.
- Setting campaign deadline & schedule: Now that you have sorted out the basics, it is time to set the deadline and schedule. Before deciding a deadline, figure out if you will be able to reach your goal in that time frame or not. You can take a look at the successful case studies on the platform that had similar products like yours. Setting up the schedule is a much more elaborative job; take all the aspects and shareholders into account before finalizing the schedule. According to Indiegogo:
- Typically, your campaign should be running for 30 to 45 days at a stretch.
- Do not underestimate the manufacturing and shipping time
- Take into account public holidays and other sudden change of plans
- Create a pitch video: According to Indiegogo, campaigns that have a pitch video raise money 4 times more than the ones without a video. Here are some of the things to keep in mind while making a video:
- Make a 2 to 3 minutes video.
- The first 30 seconds of the video are the most important, give a one-sentence summary of your project in them.
- Explain your goals in the video.
- Share the features and benefits of the product for the consumer.
- Tell your story: On your campaign page, you can tell your audience your story. Optimize for campaign page for the best results and realizing that on average, a person only spends a few minutes on a campaign page. Here are some of the key points:
- Start the campaign with a high-resolution image to attract people.
- Include a short summary of your project.
- Tell your contributors what they can expect from the project.
- Include your team members.
- Set your timeline and budget.
- Mention the benefits of the project.
- Setting perks: Setting up smart perks are the core of every great campaign, according to Indiegogo. The better your perks are, the more chances you have getting funds from contributors. Here are some of the most common type of perks:
- Downloads: Offer digital downloads to contributors in exchange of their funding.
- Experience: This can include a one-on-one meeting or even a Skype video in exchange of funds.
- Personal touch: In exchange of pledged money, you can offer a thankyou note or a some personal story about the business.