Crowdfunding: A method of raising capital through the collective effort of friends, family, customers, and individual investors. Crowdfunding is by definition, “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”
Crowdfunding is also called: Investment Crowdfunding, Securities Crowdfunding, Crowdinvesting, Crowd Financing, Debt Crowdfunding, Crowdfunding and Equity Crowdfunding
JOBS Act: A bill signed into law by President Obama on April 5, 2012, aimed at encouraging startup and small business funding by easing key regulatory burdens surrounding fundraising.
Campaign Length: Every platforms allows different lengths of the campaign. The typical campaign ranges from 30-45 days and this is optimal to maintain urgency with your funders.
The Players in Crowdfunding
Creator (aka campaigner, creator) The person who runs a Crowdfunded project; can be an entrepreneur, artist, author, musician or inventor, etc.
The financial backer / supporter / pre-orderer/ funder/ supporter: This is the person who commits funds to the production of whatever the creator is attempting to fund. This person does not get a conventional equity stake in the project, rather they generally receive some great rewards and discounts for being an early supporter. However platforms providing equity stakes are starting to appear.
Accredited investor: Individuals with a net worth exceeding $1M or an income exceeding $200K for the past 2 years. Currently, only accredited investors, a group comprised of some 3.4M Americans, are legally allowed to invest in private companies in the U.S. This restriction will be lifted under Title III of the JOBS Act, opening up private investment to non-accredited investors.
Types of Funding
Donation-based crowdfunding – Any crowdfunding campaign in which there is no financial return to the investors or contributors. This includes rewards campaigns where you can exchange payment for a reward, such as your product, experiences or downloadable material.
Rewards – At the heart of any rewards-based campaign are the rewards. Although a small number of backers will support your business solely out of personal affinity or the desire to see you succeed, the vast majority will decide to pledge based on what they get out of investing with you. What you offer your backers is entirely up to you (though campaigns on Fundable must have at least 3 rewards tiers), so it’s worth thinking long and hard about what would incentivize your customers. Rewards generally fall into 3 main categories:
- Pre-orders – By far the most popular type of reward, this approach simply involves selling pre-orders of the product you’re raising money to produce. This is a great mid-level reward and is an exciting way for backers to experience the impact of their contribution.
- Services – If pre-orders aren’t available or don’t fit your business model, you can offer special services in exchange for support. We’ve seen everything from Founders preparing a home-cooked meal for backers, to developers offering to write code for fans and supporters.
- Recognition/Swag – A perfect entry-level reward for donations under $20, this category offers backers some sort of personal recognition for their support. This can include a company t-shirt commemorating the campaign or the backer’s name on the company website.
Equity-based crowdfunding – Any crowdfunding campaign that allows contributors to become part-owners of your company by trading capital for equity shares.
Two types of rewards funding:
- Keep-it-All (KIA) – The creator keeps the funding, even if the funds don’t reach the goal
- All-or-Nothing (AON) – The creator keeps the funding only if the goal threshold is met
Crowdfunding platforms vary by their rewards system:
- Donation-based – No rewards
- Reward-based – Non-financial rewards (products, services, downloads etc.)
- Lending-based – Financial returns (Typical Loan with Interest)
- Equity-based – Equity returns (Company Shares)
The platform: This is the place where the exchange takes place (more on this below).
Kickstarter: The largest crowdfunding site with more than 13 million visitors every month, Kickstarter hosts crowdfunding campaigns from comics and crafts to technology and Theater. The site does not allow campaigns for social causes so you’ll need a product or event to promote.
Indiegogo: Similar to Kickstarter, except that here, you can raise funds for almost any project, including donations for charity. This opens the crowdfunding site up to campaigns for personal finances, medical needs and just about anything. Kickstarter has gotten better about supporting international campaigns but I still hear from some campaigns that they prefer Indiegogo for raising money from international sources.
GoFundMe:GoFundMe is one of the most popular fundraising websites for personal fundraising causes. The platform offers a little more personalization in campaigns and three models for fundraising: personal campaigns, charity fundraising and all-or-nothing campaigns.
Fundable:Fundable is one of the few crowdfunding platforms to offer both equity crowdfunding and rewards-based crowdfunding. One of the most interesting features on Fundable is that it charges no fee associated with how much your campaign raises, i.e. the 5% fee on Kickstarter. This means you keep any money pledged and makes the site more attractive to those looking to raise a large amount.
Press Release or Press Kit (PR): A press release is a short, compelling news story written by a public relations professional and sent to targeted members of the media. For a crowdfunding campaign this document should be focused on the business not just the campaign. Crowdfunding alone is not newsworthy, but your idea is. The Press Release is part of the press kit which includes: a package of promotional material provided to members of the press to brief them, especially about a product, service, or candidate. This may include a cover letter, the PR and visuals to help explain your idea.
Pitchdeck: A pitch deck is a brief presentation, often created using PowerPoint, Keynote or Prezi. It’s used to provide your audience with a quick overview of your business plan. You will usually use your pitch deck during face-to-face or online meetings with potential investors, customers, partners, and co-founders. It is typically 15 pages or less and uses more images than text. Here is a good video on how to pitch by a well known VC: https://youtu.be/51TLge2peLc
Landing Page: The web page explaining the summary of the project and a guide to its parts. By viewing the landing page, you can determine how much money the campaign is raising, the donation deadline and what you get in exchange for your donation. This page is essential for acquiring emails in prelaunch and helping new people and established fans to find their way to your campaign.
Every Campaigner Should Know:
The Green Bar Effect: When people see a lot of projects on a crowdfunding platform, they look for ones with green bars already filled in. Projects get fully funded by a combination of people’s natural curiosity and a desire to be part of a winning campaign.
Social proof: The phenomenon where people follow the examples of others in an attempt to reflect the best course of action in a situation. In a crowdfunding campaign, your early backers generate your social proof. Once early adopters vet and buy into your idea, others are more likely to follow.
Traction: When conducting a crowdfunding campaign, you may also generate traction for your startup. This can be demonstrated through large numbers of backers, pre-orders of the product, media attention or service your startup offers. Generating traction is an important step to prove success and prepare for investor pitching.
Updates: Throughout your campaign you will have the opportunity to keep your funders posted on the progress. A successful campaign always keeps their backers in the loop.
Stretch Goals: A stretch goal is a funding target set by the project creator beyond the original Kickstarter goal. Stretch goals as a term and a practice emerged from the Kickstarter community as a way for creators to “stretch” beyond the initial, official goal of the Kickstarter project and raise more money (and often make cooler stuff!). Funds are collected whether stretch goals are met or not, as long as the project has met its Kickstarter funding goal.
Pre-buzz:The initial preparation of a crowdfunding campaign, which starts before it goes live on a crowdfunding platform.
Soft Launch – Getting the word out to your audience—friends, family, existing customers—about your upcoming crowdfunding campaign, usually at least a month before your actual launch. Using social media, email marketing, and word-of-mouth are all effective ways to build awareness and make an initial pitch before actually asking for money.