What Is Crowdfunding?
What Is Crowdfunding?
- the ClickStart Crew
Crowdfunding has recently become a bit of a buzzword. In the last few years it has become popular and is recognized as a new industry, but in reality the concept has been around for centuries. By definition, crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet.
Since the economy tanked in 2008, small businesses and individual enterprises have faced more difficulties than ever before to stay afloat. Entrepreneurs trying to start new businesses meet with big lenders who no longer lend and are rebuffed by venture capitalists who are doing fewer deals with fewer dollars. Crowdfunding is an alternative way to raise capital that offers individuals and businesses a chance at success by allowing them to get support from the general public to fund their projects.
There are two distinct types of crowdfunding: rewards-based crowdfunding and equity crowdfunding. This article is about rewards-based crowdfunding. For information about equity crowdfunding and the JOBS Act, please see this article.
So how does rewards-based crowdfunding work? Let’s say you’re a writer. You’ve been published before but now your editor says that they are publishing a fraction of the books per year that they used to. You know people will buy your work, so you decide to self-publish – but you need funding.
You get wise and create a crowdfunding project. It has a short video, information about your project as well as details about your previous work so people can see your track record. It’s short but informative and includes images to make it a fun read for your audience. You list the rewards you’ll give for each donation, with some images to elaborate. You’re creating a compelling message that creates a connection with potential supporters. You set a goal for the amount of money you need to raise and set a fixed number of days. Your project launches, promotion begins, and (hopefully) contributions start coming in. Instead of being funded by one loan or a small group of investors, crowdfunding projects are funded by a large number of relatively small contributions from the general public.
Unfortunately this is not the Field of Dreams - just because you build it doesn’t mean they’ll come. Many people have a misconception that creating a project and clicking submit will make it go viral and suddenly it will be magically funded. While this has happened with a few projects, it’s far from being the norm. The vast majority of successful projects receive at least 30-40% of their funding from their own networks of friends, family, co-workers, and the connections those people (i.e. 2nd and 3rd degree connections). To understand why this is the case, let’s use a metaphor. You’re at a party with 100 people. Everyone is standing around chatting because, while the DJ is great, nobody wants to be the first one to bust a move. One or two people go out, then a few more trickle in here and there, but still most people stay back. But by the time 50 people are getting jiggy with it, the rest of the start to think they’re missing out on the fun, and suddenly the dance floor is packed and finally the party is a smashing good time for all.
Your personal connections start the party so that others will want to get involved and contribute to your project as well. Once a project has seen some traction, random people you don’t know will be quick to support your project if it’s something that they believe in.
You should have this support arranged before your project launches. Talk to people and get a commitment so that you know people will be contributing within the first few days of launch. Create a plan before you launch about how you will promote the project to through Facebook, Twitter, other social media, and email. Contact local media and bloggers who might be interested in writing a story or feature about your project because it’s relevant with what they normally cover.
The majority of the American public isn’t familiar with the concept of crowdfunding yet, and a common misconception is that it’s all about getting something for nothing. If your project is about looking for handouts, it’s probably not going to succeed. You need people to get behind your project, both financially and with moral support. Friends and family may support you without asking too many questions because they believe in you (or feel a sense of obligation). But if you’re asking people you don’t know to give you money and spread the word, you need to give them a good reason to do so.
So why would a complete stranger support your project? One reason is that they feel a connection with your product or rewards. If you have a product people want, many people are willing to pay a premium for it because they appreciate your previous work or they want to feel involved with your project. Another reason is that they feel an emotional connection with you or your project. A person may like your project idea but not necessarily feel compelled to contribute. But if you deliver a compelling message in your project video, you may make an emotional connection that converts a random viewer into an ardent supporter. They believe that your project is connected to a greater purpose. Let’s say you’ve invented a cool product that also happens to be eco-friendly. You may draw people who wouldn’t necessarily buy your product, but they’re willing to support your project because it integrates with a cause they’re passionate about.
If you’ve got an idea or project you’re passionate about but haven’t moved forward because of lack of funding you have options. Option 1: Stay on the sidelines, pray for miracles and wait for the economy to improve and the banks to start lending again. Option 2: Make a decision that your dream deserves to become a reality now and crowdfund it. Every revolution needs a renegade. ClickStartMe is revolutionizing crowdfunding. We’re looking for renegades to join us in our mission to take back the American Dream. What will you revolutionize?