Crowdfunding definition

Crowdfunding started back in 1997 when the fans of rock band Marillion raised $60,000 so that they could tour following the release of their seventh album. Using the internet to raise funds is simple and effective and since the late 1990s the marketplace has grown substantially.

What is crowdfunding?

Crowdfunding is a way of raising funds by asking lots of people for a small amount of money. Before the launch of crowdfunding, financing a business or project relied on a few people investing large sums of money. Crowdfunding challenges this traditional way of raising money by using the internet to reach thousands, if not millions, of prospective investors.

The way it works is that those seeking funds set up a profile of their project on a website such as Kickstarter, GoFundMe and Seedrs. They can then utilise social media and more conventional friends and family networks to raise the money they need.

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Crowdfunding definition

Crowdfunding investment

There are many ways that people can invest in a crowdfunding project. The type of method chosen depends on the reason why funds are being raised and how much finance is required. The three main types of investment are:

Donation

This describes any crowdfunding campaign in which there is no financial return for the investors. People invest because they believe in the cause. Donation-based crowdfunding initiatives include fundraising for disaster relief and charities.

Reward

As the name suggests, investors contribute to a project in exchange for a reward, typically in the form of a product or service that the business offers. Even though investors receive a tangible return for their money, this form of crowdfunding is considered as a type of donation since there is no financial or equity return.

Equity

Unlike the donation and reward methods, equity crowdfunding enables investors to own part of a company by exchanging money for equity shares. As equity owners, theyll receive a financial return on their investment and ultimately earn a share of the profits in the form of a dividend or distribution.

Benefits of crowdfunding

There are many advantages to using crowdfunding to raising funds compared to more traditional methods. Here are just a few benefits:

  • Its an effective way to reach credible investors
    By using popular crowdfunding platforms, youll have access to thousands of accredited investors. Its a great way to raise awareness of your fundraising campaign and allows you to interact with potential backers.
  • Its a great way to promote your campaign
    Crowdfunding platforms enable you to keep all the promotional information about your campaign in one place. This makes it easy for you to share and publicise your campaign through social media, email newsletters, and other online marketing techniques.
  • It offers validation of your concept
    The crowdfunding process provides an excellent opportunity for you to validate and improve your idea. As prospective investors show an interest in your campaign and ask questions, youll be able to identify if there are any refinements which can be made to make your idea more appealing to others.
  • Its extremely efficient
    When you launch your crowdfunding campaign, youll create a single and informative profile which can be viewed by all potential investors. This removes the need to duplicate the effort by updating each backer individually. You can update your profile on the crowdfunding platform allowing you to concentrate on running your business rather than spending time fundraising.

How to run a successful crowdfunding campaign

Firstly its vital that you share how your business idea can benefit potential investors. But whats equally as important for prospective backers is who you are and how you got your idea. Reveal what youre planning to do, what your budget is and why youre passionate about your project.

To maximise the effectiveness of your campaign, youll also need to promote it. You should use social media to spread your message, but you must also take an innovative approach to your marketing activity. Reach out to bloggers to cover your campaign or host a live event to reach more potential investors and generate attention and engagement.

You should also prioritise the needs of your backers. Without their support, your campaign will struggle to succeed. Ensure that you keep them updated at key stages throughout your project and remember to fulfil on your promises. Your campaign doesnt end when you reach your funding goal but rather when your investors have received their rewards or financial returns.

Crowdfunding UK

The popularity of crowdfunding has been growing in recent years with 2017 seeing Seedrs, one of the UK's largest platforms, exceeding £300 million of investments since it launched in 2012.

There have been many successful crowdfunding initiatives in the UK in recent years. Here are just a few:

BrewDog
BrewDog, the UKs leading craft brewer, raised £4.1 million by offering fans of its beer the opportunity to invest. BrewDog is the brewer behind Punk IPA, which is the No. 1 craft beer in the country and it has 50 craft beer bars around the world. The money raised from their crowdfunding initiative will be used to continue their growth globally.

goHenry
goHenry is a digital banking app to help kids to manage their money. When the crowdfunding project was launched goHenry set a target to raise £2 million. They achieved and more, raising £4 million which will be used to fund the companys growth in the UK and internationally.

JustPark
With a target of just £1 million, JustPark managed to secure more than three times that amount in 2015 to help steer car parking into the digital era. The £3.51 million raised has been used to develop an app which allows drivers to book off-street parking spaces online before they set off on their journey.

Summary

Crowdfunding has become a credible and effective way for aspiring entrepreneurs and new start-up businesses to validate their concepts, find investors and get the much-needed exposure required to grow. Compared to more traditional forms of fundraising, crowdfunding is:

  • More efficient.
  • Able to validate a concept and provide momentum for a business idea or project.
  • An excellent opportunity to refine and improve ideas.
  • A way to access early adopters which become loyal advocates.

 

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