How Crowdfunding Works

 

Crowdfunding is a new, innovative way that smart entrepreneurs are raising early stage capital.  However, because this method is relatively new, few understand exactly how crowdfunding works.

 

Simply stated - crowdfunding works by presenting your idea to people inside and outside of your network and allowing them to contribute toward your fundraising goals online.

 

Crowdfunding Does 3 Things Well

 

1. Publicly announces your idea.  Providing a platform to communicate your idea is incredibly valuable.

 

2. Leverages Your Network.  A shareable profile allows you to syndicate your raise across your network, and more importantly, to friends of friends.  This is really how crowdfunding works to your benefit.

 

3. Coordinates your Fundraise Quickly.  Serves as a central point to push all supporters to in a short period of time, usually between 30 - 90 days.  At the end of the fundraise, funds are collected from supporters.

 

In this section we will provide an overview of who you are targeting for your fundraise, how to choose betwen Rewards or Equity, and how crowdfunding campaigns work.

 

 

Key Topics:

 

• Who is the "Crowd" Anyway?
• Funding Incentives - Rewards or Equity
• How a Crowdfunding Campaign Works

Who is the "Crowd" Anyway?

The crowd is essentially your personal network, potential customers, and in the case of an equity fundraise, outside investors.  The popular myth about how crowdfunding works is that you post an idea and thousands of strangers give you money.  That absolutely doesn't happen - it's not a magic bean!

 

Crowdfunds Leverage Three Networks:

 

Your Personal Network.  Friends, family and colleagues.  People that support you mostly because they want to see you succeed.  Your relationship with them is a big driver of their support.

 

Friends of Friends.  Often the most amazing part of a crowdfund is discovering the people you never realized you had a connection to.  This tends to be people who your friends share your fundraise opportunity with through methods like social media, email or word of mouth.

 

Potential Customers.  Those that have an interest in what you're actually going to produce and would love to be an early customer.  These customers are often discovered through PR that you generate, campaigns through social media, or marketing to existing customers lists.

 

To truly get the advantage of how crowdfunding works, you'll want to tap into all three of these methods simultaneously, to build a strong network effect in a short period of time.

 

For more detail on how this works, take a look at our explanation of Crowdfunding Marketing.

 

 

Funding Incentives - Rewards or Equity

 

Crowdfunding works by offering an incentive to backers for supporting you.  These incentives fall into two major categories - Rewards Crowdfunding and Equity Crowdfunding.

 

Rewards offer value for capital.  This is value you provide to backers in exchange for their contribution.  There is no equity stake in your company offered.  Rewards work particularly well for products that have a strong affinity from backers, the opportunity to pre-sell the product, or when you can offer a unique value to supporters.  In every case you must exchange "value for value".
 

Highlights of a Rewards Campaign
 

• Offer pre-orders, value incentives
• Typically raising less than $50,000 (but can be more)
• Anyone can back you
• No equity dilution

Equity is a stake in your company.  Equity campaigns work well for larger raises over $50,000 where the core incentive is ownership in the business.  Equity stakes are typically offered with a minimum contribution of $5,000 or higher, making it more feasible to raise a large amount of money from a smaller number of investors.  Unlike Rewards campaigns that often require many backers, Equity campaigns can often meet their goals with just a handful of investors.

 

Highlights of an Equity Campaign
 

• Offer equity stake in exchange for investment
• Typically raising more than $50,000
• Only Accredited Investors can invest

You may choose to use either method, but not both at the same time.  Since campaigns run on a fixed period typically 30 - 90 days, it's possible to run campaigns in succession. For example, if you wanted to run a Rewards campaign to generate product interest and then an Equity campaign to raise operating capital to grow the business, that would be great.

 

How a Crowdfunding Campaign Works

 

Think of your crowdfunding efforts as a single campaign for fundraising.  Like any campaign, it requires planning, effort to execute, and has a specific start and finish date.

 

Steps to Launch a Crowdfunding Campaign

 

Create a Profile.  Creating a compelling crowdfunding profile is critical to your success.  This typically involves a pitch video, supporting copy, product images, and explanatory graphics.  

 

Set a Funding Goal.  Your campaign will be funded once your contributions exceed your stated goal.  If you don't reach your goal, no contributions will be collected.  Therefore it's important to set a goal that is achievable.

 

Market to Your Audience.  Great marketing is critical to how a crowdfunding campaign works well.  This requires planning ahead of time and strong execution during the campaign.

 

Gather Backers.  Those interested in your campaign can contribute directly to  your campaign in exchange for rewards or equity (but not both at the same time).

 

Collect Funds.  If your goal is successful, funding is transferred to your account in one of two ways.  For Rewards, credit cards are charged and money is wired to your account.  For Equity, you work directly with investors to close the transaction.

 

If this seems all new to you, don't worry.  In addition to providing tons of online resources to understand how crowdfunding works, the Fundable team is available to help answer your questions at any time.

 

Feel free to contact us here!