How crowdfunding works – A Beginner’s Guide

Crowdfunding is the pooling of money in small amount from a large number of people, using the internet and social media. Money can be raised to fund a project or for charity or to start a new business.

There are three major players involved in crowdfunding:

  • The campaigner
  • Crowd or backers or investors
  • Platform

The campaigner is the person who is looking to raise money for a cause by showcasing the story to potential donors or investors which can be to develop a product, for charity or project.

crowdfunding

Crowd means those who support the work for which money raised. They are also called backers or investors. These backers or investors will need reward in return for backing your project. Based on the type of fundraising, some of the backers need you to send the initial product that your company manufacture while others may ask you for shares in your company.

To be a successful fundraiser in crowdfunding, you need to plan it to ensure that all the people that funded you are satisfied.

Platform is a place which hosts the campaign and brings together the campaigner and crowd. It’s a forum for fundraiser to pitch their idea in front of waiting investors. These platforms generate revenue from campaigners as a percentage of the money raised. Kickstarter, Indiegogo, and gofundme are three popular crowdfunding platforms.

Instead of visiting banks or financial institutions for funding, entrepreneurs can raise funds by showcasing their ideas to public in a crowdfunding platform.

In general, there are three different types of crowdfunding, donation, rewards and equity based.

In donation based crowdfunding, fundraiser asks fund for philanthropic or sponsorship purpose. This is the most common form of asking money in which donors support a specific cause without expectations of financial return.

In the second category, fundraiser offers non financial rewards such as free product, art work, music albums to supporters for contributing funds.

Finally in equity based crowdfunding, fundraiser offers stock in return of their contributions. This type of crowdfunding is not popular because of legal restrictions.

To start raising funds, the campaigner has to create a project page on the platform and start the campaign by asking public to contribute. Recently, Xiaomi India has launched Mi Crowdfunding for it’s sports shoes, sunglasses, selfie stick and LED smart bulb.

Social media platforms like Facebook and Twitter has made their site much easier to raise funds.

To raise money you need to clear following things through the platform;

  • What value you are creating and how your project differs from existing competitors.
  • You are a credible and honest person.
  • Why people will be interested in your work.
  • How you can build opportunities for the crowd.

Don’t think raising money through a crowdfunding platform is easy. You need lot of planning and hard work to be successful. To get funding for your project you need to do three things right; create an amazing reward program, have a right strategy, and choose the right platform.