Over the past several years, crowdfunding has become a popular way to get funding for projects. Crowdfunding is a tactic where an individual or company asks for small donations from friends, family, and strangers in order to reach their monetary goal. With enough people donating, the economy of scale kicks in. Even if you are only getting a fraction of a cent from each person, you could still hit your goal with enough people.
The ease and availability that crowdfunding websites offer has driven people to ask for – and receive – funding for a variety of projects. People have funded anything from making potato salad to creating a cryptocurrency. Some well-known successful campaigns are the Pebble Smartwatch which raised $10,266,845 of their 100,000 target, the Oculus Rift which was sold to Facebook for $2Billion in 2014, and the Fidget Cube, which had 154,926 backers.
Costs of Crowdfunding
Most platforms charge a fee in order to use them to get funding for your project. 5% appears to be the most common. On top of that, crowdfunding sites often charge a processing fee per transaction. Most processing fees are around 30¢ per transaction plus 3-5%.
Project Funding Types
How confident are you that you will reach your goal? If you don’t reach it are you willing to to receive whatever money people have donated? This is exactly what happens with all-or-nothing campaigns. Your supporters are only charged, and you only receive funds, when your campaign hits its target. The other option is a flexible campaign. They don’t have this stipulation and projects receive the funding as it comes in.
“Of the projects that have reached 20% of their funding goal, 81% were successfully funded. Of the projects that have reached 60% of their funding goal, 98% were successfully funded. Projects either make their goal or find little support. There’s little in-between.” – Kickstarter
While a flexible campaign may seem like the better way to go, there are some perks to the all-or-nothing setup. Think about the people investing in your project. They want to support something successful. No one wants to feel as if their money is “wasted” on a failed idea. Donating to an all-or-nothing campaign gives them some peace of mind. You are taking on some of the risk that your project won’t hit the goal. They don’t have to worry that the end product is less-than-ideal or a poor quality just because not enough funds were raised and corners had to be cut. While you won’t get money if you don’t hit your target, you will gain valuable insight and feedback that can be used for the next iteration.
Give your backers more than just the warm fuzzies in return for donating to your project. There are two types of incentives that crowdfunding platforms offer: equity and rewards. Giving your backers equity is giving a them portion of the company in return for funding. Like an entreprenuer on Dragons Den or Shark Tank, you are digitally presenting your project in order to get the funding you need now in able to grow. You need a solid business plan and know for what purposes the money you receive will be used. Investors are taking a chance that your company will be productive and they will be able to sell that share for more than they purchased it for. They now are a part of your company so you will need to give them updates on your progress as well.
With a campaign that gives rewards, you get to determine what to repay the people funding your project with. Rewards can be almost anything, although most relate to the project being funded. They can be shoutouts, a handwritten thank you card, early access to the product, discounts, incorporating their idea into the project, mentioning their name on a sponsors page, exclusive content, etc. There are often several tiers with the higher price points offering bigger, better rewards. Although it may not seem like much, it’s good to include a $1 tier. Many people can spare it and if they like your idea and get something out of it for themselves, there’s little reason they wouldn’t donate!
Top Crowdfunding Platforms
Each crowdfunding platform has its own rules, fees, and preferred projects. Here’s a quick rundown of the three most popular ones.
Cost: 5% and processing fees of 3% + $0.20 per pledge. Pledges under $10 have a discounted micropledge fee of 5% + $0.05 per pledge.
Funding Rules: All-or-nothing
Primary Project Types: Must have a defined goal and end with something that can be shared. Art, Comics, Crafts, Dance, Design, Fashion, Film & Video, Food, Games, Journalism, Music, Photography, Publishing, Technology, and Theater
Cost: 5% and a processing fee of 2.9% + $0.30
Funding Rules: Flexible
Primary Project Types: “Life’s important moments” such as funerals, medical costs, sports teams, nonprofits, etc.
Incentives: Karma, the warm fuzzies
Cost: 5% and a processing fee of 3%. $25 fee for international wire. 0% platform fee on Generosity for nonprofits
Funding Rules: Flexible or all-or-nothing
Primary Project Types: creative, entrepreneurial projects, nonprofits, social causes
Incentives: Rewards or equity
Other items of note: Includes a marketplace for when your project is ready to be sold, analytics, and marketing tools.
Need somethign to show your investors like a click-able prototype, wireframes, high-design, architecture, or project roadmap?