Crowdfunding utilizes small amounts of capital from a large number of individuals to finance new ventures. Leveraging vast networks accessible through social media and dedicated crowdfunding websites, it facilitates connections between investors and entrepreneurs, expanding the investor pool beyond traditional circles such as owners, relatives, and venture capitalists.
Key Takeaways
- Enables companies and individuals to raise capital from numerous investors, sometimes for as little as $10.
- Imposes restrictions on who can fund a new business and their contribution limits.
- Crowdfunding platforms earn by taking a percentage of the raised funds.
- Equity-based crowdfunding ventures are regulated by the SEC in the United States.
- Popular platforms include Kickstarter, Indiegogo, and GoFundMe.
How Does Crowdfunding Work?
Access to and raising capital is essential for company growth. While larger corporations can easily obtain funds from investors or additional loans, smaller companies and startups often face challenges, making crowdfunding a suitable solution. It empowers entrepreneurs to secure funds from potential investors, providing a venue to pitch ideas on a broad stage.
Successful Crowdfunded Project Example
Among the amusing projects, one example is a campaign to create a new potato salad recipe. What started with a $10 goal raised over $55,000 from 6,911 backers, illustrating crowdfunding’s potential. These platforms usually charge a percentage of the funds raised as their revenue.
Significant Milestones in Crowdfunding
The first recorded instance was in 1997 when a UK-based music group raised money for a concert tour via fan donations. ArtistShare, the first official site, came online three years later. Over time, global regulatory frameworks, such as those posed by the U.S., began governing certain types of crowdfunding.
Regulatory Considerations
- Restrictions exist on who can fund and how much can be contributed.
- Rules aim to protect non-wealthy investors from excessive financial risk.
- High failure rates increase the likelihood for investors to lose their investment.
Types of Crowdfunding
Traditionally used by startups and individuals in emergencies, the term encompasses several applications:
- Tragedy Relief: Individuals affected by natural disasters or medical expenses receive vital financial relief.
- Creative Funding: Platforms like Patreon and Substack help artists and creators maintain a steady income.
Popular Crowdfunding Platforms
GoFundMe
Largest platform focused on personal causes like medical expenses and disasters, raised over $25 billion since 2010.
Kickstarter
Popular for creative projects with funding goals. Since 2009, it has successfully funded almost 250,000 projects with over $7.6 billion pledged.
Indiegogo
Started in 2008, it’s more flexible than Kickstarter, allowing campaigners to choose between fixed or flexible funding models.
Crowdfunding Benefits and Drawbacks
Advantages
- Connects startups with a diverse investor/supporter base.
- Boosts audience reach while raising necessary funds.
- Equity-based crowdfunding is gaining traction for venture capital alternatives.
Disadvantages
- Potential reputation risks for individuals/companies turning to crowdfunding.
- Percent-based fees and the all-or-nothing goal pitfalls on some platforms.
Examples of Successful Crowdfunding Campaigns
Oculus VR
Launched a Kickstarter in 2012, raising $2.4 million versus a $250,000 target, acquired by Meta for $2.3 billion in 2014.
M3D
Raised $3.4 million in 2014 for its Micro 3D printer on Kickstarter, now sold at major retailers like Amazon and Staples.
Critical Role
Raised $4.7 million in 24 hours for an animated series on Kickstarter in 2019.
Crowdfunding FAQs
What is Crowdfunding and How Does It Work?
Crowdfunding entails raising small amounts of money from a large pool of individuals to fund new ventures, with investors potentially receiving rewards or equity.
Do You Pay Back Crowdfunding?
On donation-based crowdfunding platforms, repayment isn’t required, though companies might offer rewards like early product copies.
Crowdfunding Legality
- Australia: Since 2017, crowd-sourced funding is legislated under the Corporations Act 2001.
- Nigeria: Allows companies with at least two years of operations to raise funds via Crowdfunding Portals, providing shares, debentures, or other investment instruments in exchange.
Conclusion: Embracing the Future of Funding
The digital era has ushered in crowdfunding as a unique method for organizations and individuals to amass significant capital from a broad audience. Capital seekers need only perfect their pitch and target the right crowdfunding site like GoFundMe or Kickstarter. While large donations are seductive, it’s often the amalgamation of smaller ones that achieve goals.
Related Terms: social media, venture capitalists, capital, revenue, entrepreneurs, rewards-based crowdfunding, equity-based crowdfunding.
References
- Kickstarter. “Potato Salad”.
- Fundable. “The History of Crowdfunding”.
- GoFundMe. “About GoFundMe”.
- Kickstarter. “Stats”.
- Kickstarter. “Prohibited Items”.
- Indiegogo. “About Us”.
- Kickstarter. “Oculus Rift: Step into the Game”.
- Kickstarter. “The Micro: The First Truly Consumer 3D Printer”.
- Kickstarter. “Critical Role: The Legend of Vox Machina Animated Special”.
- Australian Securities & Investments Commission. “Crowd-sourced Funding”.
