how crowdfunding works
raising capital is key to any company s growth larger established corporations often find it easier to secure investments or additional debt from lenders however smaller companies and startups often face significant challenges in this area this is where crowdfunding proves valuable crowdfunding has allowed entrepreneurs to raise substantial amounts of money from a wide pool of investors for example one humorous kickstarter project involved an individual seeking to create a new potato salad recipe with a modest goal of 10 but ended up raising over 55 000 from 6 911 backers investors can choose from numerous projects and invest as little as 10 crowdfunding sites typically earn revenue by taking a percentage of the funds raised 2investors can select from hundreds of projects and invest as little as 10 crowdfunding sites generate revenue from a percentage of the funds raised for example kickstarter applies a 5 fee to the funds collected 3special considerationsthe first instance of crowdfunding was recorded in 1997 when a music group from the united kingdom raised money for a concert tour from fans artistshare which was the first crowdfunding site was launched three years later almost a decade later it became a key source for companies to raise capital 4crowdfunding platforms were largely unregulated when they first became popular however things changed over time as several countries including the united states began placing restrictions on certain types of crowdfunding 5these restrictions apply to who can fund a new business and how much they are 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 because so many new businesses fail their investors face a high risk of losing their principal the crowdfunding industry is regulated under the jobs act enacted on april 5 2012 which 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 transactions occur through registered intermediaries these rules aim to protect investors and maintain transparency in crowdfunding investments 5many crowdfunding projects offer rewards to investors such as participating in a product launch or receiving gifts for example a filmmaker might offer a behind the scenes tour of the movie set while a chef launching a new cookbook might provide a private cooking class these experiential rewards aim to create a personal connection between the project and its supporters 6types of crowdfundingthe two most traditional uses of the term reflect the type of crowdfunding done by startup companies looking to bring a product or service into the world or by individuals who experienced some type of emergency for example people affected by natural disasters or high medical expenses often turn to crowdfunding platforms for support recently crowdfunding platforms like patreon and substack have expanded crowdfunding s reach enabling artists writers musicians and podcasters to sustain their creative work through ongoing financial support from their audiences popular crowdfunding websitescrowdfunding 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 since its founding in 2010 the site has raised over 30 billion with 150 million people either sending or receiving money through the platform 7 it s most popular for individuals seeking to recover from medical expenses or disasters such as house fires natural disasters or unexpected emergency expenses start up companies tend to use kickstarter kickstarter is another popular choice founded in 2009 the platform has successfully funded more than 250 000 projects with more than 8 billion pledged across all kickstarter projects 8kickstarter 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 additionally kickstarter can t be used for charity or cause donations and projects can t offer incentives like equity revenue sharing or investment opportunities kickstarter also prohibits projects involving items claiming to diagnose cure treat or prevent illnesses political fundraising drugs or alcohol and any form of contests coupons gambling or raffles 9indiegogo started as a crowdfunding site for independent films but expanded to all project categories a year after its 2008 launch 10indiegogo is seen as a less strict and more flexible platform than kickstarter as it gives backers more flexibility by allowing campaigners to choose between fixed and flexible funding models while kickstarter releases funds only if the campaign meets its funding goal 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 come might be easier and less risky for a campaigner however regardless of the amount raised campaigners must still deliver on any promises made for a backer fixed funding is more attractive as it s associated with much less risk crowdfunding platform fees range from 5 to 12 11 before choosing a crowdfunding platform be sure to examine the fee structures for any punitive charges pros and cons of crowdfundingthe 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 in some cases it also offers investors the opportunity to earn an equity position in the venture in the united states the securities and exchange commission sec regulates equity based crowdfunding 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 if you don t reach your funding goal the pledged funds will be returned to investors leaving you with nothing great way to interact with potential consumersability to gauge public opinion on your productpledged financing is returned to investors if the funding goal isn t reachedmay damage start up company s reputationexamples of crowdfundingmany of the products and businesses crowdfunded on kickstarter became very successful and lucrative endeavors for instance oculus vr an american company specializing in virtual reality hardware and software products was funded through the site in 2012 founder palmer luckey launched a kickstarter campaign 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 12 in march 2014 meta meta acquired oculus vr for 2 3 billion in cash and stock another example of a company that rose to success through kickstarter campaigns is m3d a company founded by two friends that manufactures small 3d printers david jones and michael armani raised 3 4 million for their micro 3d printer on the crowdfunding site in 2014 13 the tiny 3d printer which comes with a variety of durable 3d inks is now available at staples amazon amzn brookstone and elsewhere critical role a weekly live streamed tabletop roleplaying game featuring a group of prominent voice actors raised 4 7 million in just 24 hours for its latest 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 14in 2023 the gpd win 4 a handheld gaming pc raised nearly 4 million on indiegogo becoming the platform s highest funded product the device showcases the growing interest and investment in portable gaming solutions 15