Crowdfunding 101

Before kicking off a campaign, check out these Q&As that provide details on the types of crowdfunding available and steps to take to prepare. 

What is Crowdfunding?

Crowdfunding is "the" alternative method for entrepreneurs, creative thinkers, and non-profits to get funding. In its basic form, it is the pooling together of small amounts of money from a group of people that share your passion and that you interact with online using social media. Everyone can use it without going to the banks or VCs, and the likelihood of getting funded is significantly higher.

 Can I raise money through crowdfunding? 

Yes, anyone can use crowdfunding. Anyone can go to a crowdfunding website, create an account, build a campaign and post it. Some websites have requirements (e.g., the project must be less than 60 days in length) and a review process. So check out the details of the platform.  

There are also best practices that you should know that can significantly increase your chance for success (e.g., posting a video with a rewards campaign increases the chance of reaching your goal by 60%). 

 

There are four basic types of crowdfunding: Donation, Rewards, Debt and Equity. Each type is based on what the investor receives in return for funding a campaign.  

Donation - The investor receives nothing in return except possibly a tax receipt. Top platforms include GoFundMeFundlyDonorsChoose for Teachers, and Causes for raising funds and creating petitions. 

Rewards - The investor receives a reward or perk in return for pledging. Common rewards include a thank you note, a branded t-shirt, or the product being funded (i.e., a pre-sale of the product). Top platforms include KickstarterIndiegogo, and RocketHub

Debt - Often called Peer-to-Peer (P2P) or Peer-to-Business Lending. The investor gives money in the form of a loan and receives interest in return. Top platforms include ProsperLendingClubFundingCircle and P2BInvestor

Equity - The investor receives ownership in the company in return for their investment. Top platforms include CircleUpFundable, and MicroVentures.  

Currently, in the US, equity crowdfunding is only available for Accredited Investors. Accredited investors represent the wealthiest 5% of the U.S. population and are required to have an annual income of $200K+ or a net worth of $1M+.

Investing for Non-Accredited Investors (i.e., people making less than $200K annually or having less than $1M in networth) has been under discussion by the SEC since President Obama signed The JOBS Act in April of 2012. The JOBS Act legalized equity crowdfunding for Non-Accredited Investors.  

However, the SEC is required to provide regulations on Non-Accredited equity crowdfunding before in can be utilized in the U.S. The SEC released a proposal of regulations in October of 2013, which continue to be under review. To review the proposed rules, click here: SEC Proposed Rules

Which type of crowdfunding is right for me? 

It depends. 

For individuals looking to fund a project, rewards and debt are great options. You can also use donation if you are supporting a non-profit, cause, community, or life project. 

For non-profits, donation is ideal but rewards is an option also and may help to further engage funders.  

For small businesses, all types are available, but rewards, debt and equity (when legal) are more ideal. Also consider this:

If your business is generating $1M+ in revenue and expects high trajectory growth, equity could be an excellent option.  

If you are a brick and mortar business with steady income and solid finances, debt may be ideal.  

 When should I start my campaign?

It is ideal to start a campaign after you've created a following of people. These people may come from your personal contact list, social media networks, current customers and any other forum where you are communicating and engaging with people regularly.  

 How many followers do I need to have?  

This question pertains mostly to donation and rewards crowdfunding. To get an estimate, divide the total amount that you need to raise by $25. $25 is the most common amount pledged. So, if you need to raise $10,000, divide it by $25. That equals 400 people that need to give to your campaign.

But not all of your followers will give to your campaign. If you estimate that 5% of your followers will give, then... 

400/5% = 8,000 followers

This tells me that you will need to share your story with 8,000 people to raise $10,000. Most of us do not have 8,000 contacts. So, this is where having a social media and PR plan can get you the exposure you need to reach your goal. 

 When should I start building my followers?  

Give yourself at least a few months to build not only followers but engaged followers whom you interact with regularly. Engaged followers will be the most likely people to give to your campaign and share it with others.