Crowdfunding is the special activity of funding any new project or venture. This is done by raising money from a large number of people. It has the power to increase entrepreneurship by growing the overall pool of investors beyond the typical circle of owners, relatives, and venture capitalists. Backers or crowdfunders are not technically investors. They do not usually get a share of ownership in the firm. And they do not expect any financial return on their investments. Instead, crowd funders expect to get some type of gift as thanks for their contribution. Usually, that reward is the product you intend to sell or other exclusive perks. This could be like meeting the owner or getting their name in the credits. Thus, crowdfunding is a great choice for individuals who want to produce creative works. It may also be a physical product.

How Does Crowdfunding Function?

Crowdfunding campaigns have a set goal. They give incentives to the people who invest. If the aim is met, the backers usually benefit from lending their support to that campaign. Many crowdfunded firms take the money as an advanced booking of your product. Fundraising individuals get the products as soon as the firm completes the production. Many of the crowdfunding platforms give a trusted system. This includes Indiegogo, Kickstarter, Fundable, and Patreon. If the company doesn't reach its aim, the platform will return all the investments to all the fund-raisers. This happens via an automated system. This is what has led to a growth in crowdfunding in the last few years

There are several kinds of crowdfunding for start-ups. In reward-based crowdfunding, backers contribute to the project for non-financial advantages. This type of funding is typical in creative projects. The backers get a token of appreciation for funding the project. Several sites function on this business model, such as Kickstarter, Indiegogo, and many others. Donation-based crowdfunding is for charities that are functioning for a social cause. One site that's famous for donations is GoFundMe. Users create a cause and then spread the campaign link among their peers. They set an aim, and all the amount collected is sent to the account of the person who has created the campaign.

Equity-based funding is meant to receive a return on the amount that is invested. It is popular in the stock market. People buy shares of various stocks and redeem them when the prices rise. It is also great for start-ups to receive money for their initiative. But they will have to sign a legal contract that they will give equity to the shareholders. Money must be returned if the project falls apart. Debt crowdfunding is when backers give money for higher markup or interest. The debt crowdfunding alternative is typically practiced by lending companies and banks.

Advantages & Disadvantages of Crowdfunding

One of the advantages of this activity is that it does not have any risks. You simply have to create a good campaign and bring it in front of the investing public. If they like it, they will fund the project. Also, your product automatically gets exposed to a lot of potential users. Another advantage of crowdfunding is that you can set an aim for your funding amount. You can give your backers discount coupons or gift items after the project concludes. Another great advantage of crowdfunding is that you can sell your products in advance against the investments received. For example, your start-up promises to sell some shirts with tiny coolers. Now, each shirt is around $50. You can set a crowdfunding amount per consumer of $50, and you will give them the shirt as a gift. You can start shipping your shirt to the consumers when you collect the funding amount. This way, you can test market feasibility.

There are a few disadvantages as well. Sometimes you have to ship the products you promise to your campaigns' backers. If you do not deliver your products on time, the investors will likely complain to the authorities. Some might also file lawsuits. There are chances that you will not receive a single dollar if the campaign fails. This means all your efforts in the campaign will go down the drain. Further, you should note that over 60% of crowdfunding campaigns fail.

Prominent Crowdfunding Websites

1. Kickstarter

Kickstarter is almost synonymous with crowdfunding. It is a website where people can lend their support to innovative ideas. The community has successfully funded nearly 200,000 projects. This includes games, movies, physical products, and more. The platform has raised more than four billion dollars to date. Kickstarter is a reward-based crowdfunding platform. The backers are given incentives to support the different projects. This includes t-shirt shout-outs to premium pre-order discounts. The firms can offer different tiers of rewards, too; the more money a backer pledges, the better the rewards they unlock. Kickstarter campaigns are an all-or-nothing affair. You only get access to the funds and pay the website fees to meet the initial fundraising aims. If you fall short, then all the cash stays with the backers. The result is that projects on the website tend to be novel and of high quality. They are often innovative or creative enough to catch the headlines from the media and the attention of early adopters. The projects are also seen to be more trustworthy. This is because they do not give the money unless the campaign succeeds. The fees are 5% if you meet your goal. This does not include the payment processing fees.

2. Indiegogo

This is a great platform that supports nonprofits, artists, and firms. While it may sound similar to its rivals at first glance, it comes with its unique features and campaign options. The most significant difference is choosing a fixed funding goal that is a type of all-or-nothing like Kickstarter. The users can also opt for a flexible funding goal for the campaign. The firm gets the funds with flexible funding goals regardless of whether it has met its goal by its deadline. The flexible funding option is very useful when you can fulfill your promise to backers even if you cannot raise enough capital. It can be helpful when launching a new product line for an established business. Indiegogo InDemand lets you continue to raise investments. This is true even after the crowdfunding campaign ends. The firm can raise money while in production or ready to fulfill orders. InDemand is available to you on this website and other crowdfunding platforms. BodyBoss transitioned to Indiegogo InDemand. This was right after their success on Kickstarter. The start-ups based in the United States might also try out Indiegogo's equity crowdfunding offering. Here firms can submit their campaign for consideration to investors on the platform looking for a financial stake in the firm. 

3. Patreon

This is one of those websites that has a specific focus on the various online creators present in the modern internet era. Many of the top crowdfunding websites support limited-run campaigns. But this website was made for internet personalities and creators with loyal audiences to get recurring revenue using paid memberships. You can let patrons pay on a monthly basis for special community perks or pay per creation to incentivize the creator to create more. Patreon creators give all types of exclusive perks based on various payment tiers. This includes shout-outs, sneak peeks, branded swag, and exclusive content. You may be a creator who has a big online fan base and regularly ships new content. Then, it might be good to create a Patreon page. You can serve exclusive content and create a community of dedicated fans. This happens through the various integrations on the website that unlock based on the patron's membership tier. The fees are 5% if you meet your goal. This does not include the payment processing fees.

4. Crowdfunder (Shopify app)

Suppose you already have a Shopify store. You may be interested in crowdfunding a new product using the site. In that scenario, the Crowdfunder app for Shopify is an excellent fit for you. You can completely transform the product page into a crowdfunding page with this platform. It is complete with a progress bar. You can set your goal based on the money raised or the number of items ordered. It enables crowdfunding in its simplest form. You can validate any idea and fund production or accept pre-orders from people to validate an idea. Plus, you can try to avoid the commissions charged by any third-party platforms in favor of a fixed monthly fee. You can utilize it to test out new project ideas. You can also raise cash for a cause or launch some limited-run products. The fee remains under thirty dollars per month. It does not include your subscription to Shopify.

5. GoFundMe

This is a free website that has been created mainly for lending support to causes and individuals. This platform is suited to personal causes. So, any person can go about creating a campaign. The backers here tend only to support campaigns from within their own communities or networks or are familiar with them. This website has not been created for commercial crowdfunding campaigns like the other websites on this list. But you may be a small business owner who has fallen on hard times. You may also need to raise money to overcome a personal challenge. In all of these cases, you can try leveraging this website for support from the network. The service does not have any fees. But there might be separate processing fees.

6. Fundable

This service is part of the Startups.co platform. It permits start-ups to give equity or rewards in exchange for funding. According to their website, start-ups that give rewards usually raise less overall but get more backers. In contrast, the start-ups that give equity typically raise more capital from fewer people. But to get success with equity fundraising, you require all the ingredients accredited investors expect to see. You must have a pitch deck, a great business plan, and a track record of growth, if not more. The total fee is under $200 per month during active campaigns. It does not charge you a percentage of total funds raised like some of the other platforms.

Conclusion

Crowdfunding for start-ups is a great initiative when a start-up doesn't have access to investors. These firms can just launch a great campaign on a crowdfunding site. Crowdfunding is also good because it does not have much risk. In most situations, the owner gets to retain full control of the firm. Even if the plan fails, the owner is usually under no obligation to repay the crowd funders. All the crowdfunding platforms are different. You must ensure to read the fine print. The firm should also understand its completely legal and financial obligations. Crowdfunding will not sustain your firm in the long term. A firm cannot get crowdfunding continuously for the same product. After you have received the funds, you should focus on making your firm successful. You should try to deliver what you promised the public against their money.