Table of Contents
- What Is Crowdfunding?
- Understanding the Process of Crowdfunding
- Key Considerations and Historical Context
- Rewards and Incentives in Crowdfunding
- Exploring Different Types of Crowdfunding Models
- Top Crowdfunding Platforms to Know
- Evaluating the Advantages and Disadvantages of Crowdfunding
- Examples of Crowdfunding
- What Is Crowdfunding and How Does It Work?
- Do You Pay Back Crowdfunding Money?
- Is Crowdfunding Legal in Australia?
- Is Crowdfunding Legal in Nigeria?
- The Bottom Line
What Is Crowdfunding?
Crowdfunding leverages small contributions from many individuals, connecting entrepreneurs with a diverse group of potential investors through social media and dedicated platforms. This alternative funding method gained prominence after the 2008 financial crisis, as small businesses sought non-traditional funding sources when access to bank credit tightened. The global crowdfunding market continues to expand, predicted to grow annually by 15.82% from 2024 to 2033, indicating its increasing significance in the entrepreneurial ecosystem, according to the Global Equity Crowdfunding Alliance.
Understanding the Process of Crowdfunding
Secure funding is crucial for company growth. While big corporations easily attract investments, smaller companies struggle more, making crowdfunding a valuable option. Crowdfunding has allowed entrepreneurs to raise substantial amounts of money from a wide pool of investors. One humorous Kickstarter project involved an individual seeking to create a new potato salad recipe with a modest goal of $10. It ended up raising over $55,000 from 6,911 backers. Investors can choose from many projects and contribute as little as $10. Crowdfunding sites usually earn by taking a fee from the funds raised. For example, Kickstarter charges a 5% fee.
Key Considerations and Historical Context
The first crowdfunding instance occurred in 1997 when a UK band raised tour money from fans. ArtistShare, the first crowdfunding site, launched in 2000 and became a key funding source for companies. Initially, crowdfunding platforms were mostly unregulated. Over time, countries like the United States introduced restrictions on certain crowdfunding types. These restrictions apply to who can fund a new business and how much they're allowed to contribute. Similar to the restrictions on hedge fund investing, these regulations are supposed to protect unsophisticated or non-wealthy investors from putting too much of their savings at risk. So many new businesses fail that their investors face a high risk of losing their principal. The crowdfunding industry is regulated under the JOBS Act that was enacted on April 5, 2012. It established equity crowdfunding in the U.S. Initially limited to accredited investors, provisions like Title IV and Title III later expanded access to non-accredited investors and early-stage startups. The SEC oversees these regulations, ensuring that transactions occur through registered intermediaries. These rules aim to protect investors and maintain transparency in crowdfunding investments.
Rewards and Incentives in Crowdfunding
Crowdfunding projects often reward investors with gifts or experiences, like a behind-the-scenes tour from a filmmaker or a private cooking class from a chef. These rewards create a personal connection between the project and supporters.
Exploring Different Types of Crowdfunding Models
The two most traditional uses of the term reflect the type of crowdfunding done by startup companies that are looking to bring a product or service into the world, or by individuals who have experienced some type of emergency. Those impacted by natural disasters or high medical bills often use crowdfunding for support. Sites like Patreon and Substack help artists and creators get ongoing audience financial support.
Top Crowdfunding Platforms to Know
Crowdfunding websites such as Kickstarter, Indiegogo, and GoFundMe attract hundreds of thousands of people hoping to create or support the next big thing. GoFundMe is the largest crowdfunding platform. The site has raised over $30 billion since its founding in 2010 with 150 million people either sending or receiving money through the platform. It's most popular for individuals seeking to recover from medical expenses or disasters such as house fires, natural disasters, or emergency expenses. Start-up companies tend to use Kickstarter. Kickstarter was founded in 2009. The platform has successfully funded more than 250,000 projects with more than $8 billion pledged across all Kickstarter projects. Kickstarter is the leading crowdfunding platform for aspiring businesses aiming to raise capital and reach a broader audience. Unlike GoFundMe, Kickstarter is exclusively for creating shareable projects. Kickstarter can't be used for charity or cause donations, and projects can't offer incentives like equity, revenue sharing, or investment opportunities. It also prohibits projects that involve items claiming to diagnose, cure, treat, or prevent illnesses, political fundraising, drugs or alcohol, and any form of contests, coupons, gambling, or raffles. Indiegogo started as a crowdfunding site for independent films but expanded to all project categories a year after its 2008 launch. Indiegogo is seen as a less strict and more flexible platform than Kickstarter because it gives backers more flexibility by allowing campaigners to choose between fixed and flexible funding models. Kickstarter releases funds only if the campaign meets its funding goal, but Indiegogo allows campaigners to receive funds as they come in or wait until the target is reached. Flexible funding, such as receiving funds as they arrive, might be easier and less risky for a campaigner. Regardless of the amount raised, campaigners must still deliver on any promises made, however. Fixed funding is more attractive for a backer because it's associated with much less risk.
Evaluating the Advantages and Disadvantages of Crowdfunding
The most obvious advantage of crowdfunding for a start-up company or individual is its ability to provide access to a larger and more diverse group of investors or supporters. With the ubiquity of social media, crowdfunding platforms are an incredible way for businesses and individuals to both grow their audience and receive the funding they need. Equity-based crowdfunding is growing in popularity because it allows startup companies to raise money without giving up control to venture capital investors. It also offers investors the opportunity to earn an equity position in the venture in some cases. The Securities and Exchange Commission (SEC) regulates equity-based crowdfunding in the United States. Potential disadvantages of crowdfunding include the possible damage to your or your company's reputation from using crowdfunding, the fees associated with the platform, and the risk that the pledged funds will be returned to investors, leaving you with nothing if you don't reach your funding goal. Crowdfunding is a great way to interact with potential consumers and gauge public opinion on your product, but pledged financing is returned to investors if the funding goal isn't reached, which may damage a start-up company's reputation.
Examples of Crowdfunding
Many of the products and businesses crowdfunded on Kickstarter became very successful and lucrative endeavors. Oculus VR, an American company specializing in virtual reality hardware and software products, was funded through the site. Founder Palmer Luckey launched a Kickstarter campaign in 2012 to raise money to make virtual reality headsets designed for video gaming available to developers. The campaign crowdfunded $2.4 million, 10 times the original goal of $250,000. Meta (META), acquired Oculus VR for $2.3 billion in cash and stock in March 2014. Another example of a company that rose to success through Kickstarter campaigns is M3D, founded by two friends who manufacture small 3D printers. David Jones and Michael Armani raised $3.4 million for their Micro 3D printer on the crowdfunding site in 2014. The tiny 3D printer, which comes with a variety of durable 3D inks, is available at Staples, Amazon (AMZN), and Brookstone. Critical Role, a weekly live-streamed tabletop roleplaying game that features a group of prominent voice actors, raised $4.7 million in just 24 hours for its animated special, “The Legend of Vox Machina.” No other Kickstarter campaign in 2019 raised that amount over their entire 30- to 60-day raising period. The GPD WIN 4, a handheld gaming PC, raised nearly $4 million on Indiegogo in 2023, becoming the platform's highest-funded product. The device showcases the growing interest and investment in portable gaming solutions.
What Is Crowdfunding and How Does It Work?
Crowdfunding is the use of small amounts of capital from a large number of individuals to finance new business ventures. Depending on the type of crowdfunding, investors either donate money altruistically or get rewards such as equity in the company that raised the money.
Do You Pay Back Crowdfunding Money?
For crowdfunding that operates on a donation basis, the company does not have to pay back investors. Many companies offer incentives for early backers such as an advance copy of the product, however.
Is Crowdfunding Legal in Australia?
Yes. The Australian government amended the 2001 Corporations Act to provide a legislative framework for crowd-sourced funding in 2017.
Is Crowdfunding Legal in Nigeria?
All micro, small, and medium enterprises incorporated as companies in Nigeria with a minimum two-year operating track record are eligible to raise funds through a Crowdfunding Portal in exchange for the issuance of shares, debentures, or such other investment instruments as the Commission may determine from time to time.
The Bottom Line
The digital age has given rise to crowdfunding, a unique method for organizations and individuals to raise capital from a large group of people. For those seeking funds, it involves creating a compelling pitch and setting a target on a crowdfunding site like GoFundMe, IndieGoGo, or Kickstarter. Large donations are beneficial, but it's often the many smaller contributions that help capital seekers reach their goals.
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