What Is Crowdfunding?
Crowdfunding is a method of raising funds by soliciting small contributions from many supporters, instead of the traditional method of pursuing large investments from a few investors. As described in a guide on crowdfunding site Fundable, “You can think of [a traditional] fundraising approach as a funnel, with you and your pitch at the wide end and your audience of investors at the closed end.” Crowdfunding turns that funnel upside down.
While the concepts of microfinancing and microlending have been around for a long time, using online platforms to raise money is relatively new, which makes sense, since the Internet is also relatively new. Early efforts to raise money online from the masses were usually charitable efforts or responses to disasters, but with the rise of sites like Indiegogo and Kickstarter, crowdfunding for businesses looking to launch a new product or service exploded in popularity.
While crowdfunding takes many different forms, most fall under three basic categories:
1. Donation campaigns, which solicit donations for nothing in return, often for charitable causes.
2. Reward campaigns, which offer a product or service in exchange for financial support.
3. Equity campaigns, with backers investing capital in exchange for shares in the company.
Companies that choose the crowdfunding route range from small mom-and-pop outfits to tech startups, from companies offering a single item to those with an extensive product line, but regardless, the benefits of crowdfunding are significant:
Access – With popular crowdfunding sites, companies can create a single campaign and then instantaneously share it with a huge audience that goes well beyond that company’s mailing list.
Defining your concept – Just by going through the process of creating that campaign, business owners are forced to thoughtfully define what their product is, to determine what problem their product solves, to articulate what sets them apart from competitors, and to measure their addressable market. Those key details then need to be presented in an attractive, appealing package – with the help of photos and videos, say – aimed at a broad audience.
Great marketing opportunity – A crowdfunding campaign gives companies a great reason to reach out to their (ever-growing) list of customers and supporters, through email, social media, Facebook Live events, and more. The short-term nature of the campaign creates a sense of urgency and gives an unmatched opportunity to generate buzz.
Engagement with backers – From the preview stage to the end of the campaign, crowdfunding companies are likely to see significant engagement from their audience. Backers will offer feedback on the product, ask questions, or simply voice their enthusiasm. The campaign provides invaluable market research opportunities. And in the end, crowdfunding companies have an exceptionally engaged audience of supporters who truly made the launch of their product possible.