Benefits of Crowdfunding Platforms
Crowdfunding platforms allow you to raise money from individual contributors. Discover the benefits and tips for running a crowdfunded project.
Raising money for projects is a difficult process, often involving taking out loans and speaking with investors. Not only are both of these risky options, but you often have to put up some form of collateral. Even if you successfully secure funding, the initial profits of your projects often go to paying back investors or loan interest. In some cases, it may be years before you actually start to profit.
One of the newest ways to raise money is through online crowdfunding. With crowdfunding, you raise money through a large group of people, using an online platform to advertise your idea or project. While you do not owe money to whoever invests in your project, you promise certain rewards based on how much they contribute. Not all rewards are physical. For example, a common reward for videos, movies and games is inclusion in the credit. Some rewards have limits to how many contributors can claim them, such as a limited number of seats at a premier event.
Types of Crowdfunding
There are several categories of crowdfunding. Investment based crowdfunding is primarily used by businesses. Instead of having a wide range of rewards, businesses provide shares and stakes in the business. Larger contributors may even become official shareholders in the business. Investment based crowdfunding is not particularly common as of writing, but it is gaining traction among small businesses. This is sometimes referred to as equity-based crowdfunding.
Another type of crowdfunding is donation based. Unlike with other types of crowdfunding, donation based does not provide any rewards to investors. With donation-based crowdfunding, everyone who contributes is doing so to see the project get funded. Donation crowdfunding is most commonly used for charity and non-profit projects.
The most common type of crowdfunding projects are reward-based. With a reward crowdfunding project, the contributor receives a reward based on the amount they donate. Typically, the lower tiers include whatever the finished project is, such as an advanced copy of a game or early screening to a movie. Clothing, stickers and music are also common rewards at the lower tiers. At the higher tiers, contributors may be invited to special premier events, or even influence some of the design aspects, such as naming a character in a film.
In addition to the different types, how the funding is handled may also vary depending on the platform. Some platforms are all-or-nothing. This means you do not receive any of the funding unless your goal is met. If the project ends short of the goal, everything is refunded to the contributors. Other platforms allow you to keep the money, but it is not released until the end of your project. There are also platforms that provide immediate access to the funds as they are contributed.
Benefits of Crowdfunding
The biggest benefit of crowdfunding is how quick it is to raise funds. There are also fewer hoops to jump through. There is no application process with crowdfunding, once you have a pitch, you can post it to a website. Crowdfunding is also a good marketing opportunity as well. Even if viewers do not contribute to your project, they are now aware it exists. Once the final product comes out, they may turn into customers if they are interested. You can also post continual updates to your project to keep potential customers interested. Your contributors can also leave comments on how development is going, which gives you valuable feedback on how the project is going.
Crowdfunding is also a good way to pitch unconventional ideas. Many smaller businesses have good ideas, but the scope of their project is not large enough to attract major investors. For example, many board game developers and indie game developers use crowdfunding as a way to get funding because their projects are too small to appeal to traditional investors. Web series have also seen a great deal of success with crowdfunding campaigns.
Crowdfunding itself can also be a way to secure larger investments. With larger projects, the crowdfunding is only for a fraction of the costs. However, once you secure funding, you can show this as evidence to investors that there is enough interest in your project. This reduces the risk of your project and makes investors more likely to contribute.
Disadvantages of Crowdfunding
While crowdfunding has many benefits, there are some potential downsides. With reward-based projects, you must take into account how much you spend on rewards. A common mistake is promising too many rewards or not setting aside funds to develop the rewards. More complex rewards also require time to assemble, which may slow down development, especially if your crowdfunding project ends up being more successful than you predicted.
While it is not necessarily a disadvantage, it is important to keep in mind that launching a crowdfunding project can be time consuming. You need a strong opening pitch, but it is also important to keep providing substantial updates, so your contributors know you are taking the project seriously.
Kickstarter is not the first crowdfunding site, but it is often considered the most effective. Kickstarter uses an all-or-nothing model, so your projects must be completely funded before you get access to your money. In addition, when you start a project, you must wait several days for Kickstarter to approve your project before it goes live. Kickstarter takes a five percent fee on the total funds raised. There is also a three to five percent processing fee for each payment. Because it is such a well-known site, it is one of the best ways to not only reach a large audience, but show your project is legitimate.
Indiegogo is another popular option for crowdfunding. The platform offers options for both fixed and flexible fundraising. With fixed, you set an initial goal and when the goal is raised, the money is released. With flexible, you receive the funding right away, whether or not you meet the total goal. Fixed projects do not have any fees, while flexible goals have a five percent fee. Both types of projects have a 2.9 percent processing fee. Additionally, there is a minimum goal of $500.