What Is Crowdfunding? The Ultimate Guide for Startups

Raising capital is one of the biggest challenges entrepreneurs face when launching and growing their startups. While founders can pursue traditional options like bootstrapping with personal savings, pitching angel investors and VCs, or taking out loans, crowdfunding has emerged as an increasingly popular way to raise substantial funds by collecting small amounts of money from a large number of people.

The Rise of Modern Crowdfunding

The concept of raising small amounts of money from a large group has been around for centuries—as far back as the 1700s when author Jonathan Swift created the Irish Loan Fund for low-income families. But modern crowdfunding really began to take off in the late 2000s with the launches of Indiegogo (2008) and Kickstarter (2009). Their user-friendly platforms made it easy for anyone to create an online campaign and solicit donations from the public.

Since then, the crowdfunding industry has grown exponentially:

• The global crowdfunding market grew from $880 million in 2010 to $12.3 billion in 2021 (Statista)
• Transaction value in the crowdfunding segment is projected to reach $1.41 billion in 2022 (Statista)
• The number of crowdfunding campaigns worldwide rose from 87,000 in 2017 to over 520,000 in 2021 (Fundera)
• The average amount raised by successful crowdfunding campaigns was $28,656 (Startups.com)

Today there are hundreds of crowdfunding platforms catering to different types of ventures and funding models, making it an increasingly accessible source of capital for startups and small businesses.

How Crowdfunding Works

At its core, crowdfunding involves an individual or startup founder creating an online fundraising campaign, typically through a crowdfunding platform, to collect money from a large group of people—the "crowd."

The process generally follows these steps:

1. The campaign creator sets a specific funding goal (e.g. $50,000) and deadline (e.g. 60 days)
2. They create a page with a compelling pitch, short video, images/prototypes, and description of how funds will be used
3. The campaign is promoted online through the creator‘s network and platform‘s marketing channels
4. Backers make pledges via the campaign page; if the goal is met, funds are collected (minus fees); if not, money is usually returned

Backers‘ motivations range from simply supporting an impactful idea to essentially pre-ordering an innovative product to seeking a financial return on an equity investment.

Types of Crowdfunding

The 4 main crowdfunding models used by startups are:

1. Donation-Based

Backers donate money without expecting anything in return. Often used by nonprofits, social causes, and personal fundraisers.
Examples: GoFundMe, Fundly

2. Rewards-Based

Backers receive a tangible reward, often a product or service, in exchange for their pledge. Popular for launching physical products and creative projects.
Examples: Kickstarter, Indiegogo

3. Equity

Backers receive a small piece of ownership/shares in the company in exchange for their investment. Regulated by the SEC with funding caps.
Examples: WeFunder, SeedInvest, StartEngine

4. Debt

Backers‘ contributions are a loan the startup must pay back with interest. Faster than traditional loans but often at higher rates.
Examples: Funding Circle, Kiva

Here‘s how the different crowdfunding types compare:

Type	Backer Receives	Best For	Avg Raised
Donation	Nothing tangible	Nonprofits, causes	$9,237
Rewards	Product/service	Physical products	$28,656
Equity	Company shares	High-growth startups	$500K
Debt	Principal + interest	Quick loans	$107K

Sources: Startups.com, SeedInvest

Benefits of Crowdfunding for Startups

There are several key advantages to choosing crowdfunding over other financing options:

1. Accessible capital

It‘s notoriously difficult to raise money from VCs and angels, especially for first-time founders. Crowdfunding opens up early-stage financing to a much wider pool of entrepreneurs.

2. Proof of concept

Hitting your fundraising goal provides powerful validation of market demand. This traction can help attract follow-on funding from institutional investors.

3. Expanded reach

Crowdfunding platforms‘ built-in audiences and promotional tools enable founders to get their startups in front of many more potential customers than going it alone.

4. Loyal community

Crowdfunding creates an engaged community of supporters who are literally invested in your success—a group that will give you valuable feedback, evangelism and become early adopters.

"The real benefit of crowdfunding is not the money you raise, it‘s the evangelist community you build in the process," says Matt Higgins, CEO of rewards crowdfunding platform Indiegogo. "By the time your product launches, you already have thousands of built-in ambassadors."

Launching a Successful Campaign

Simply creating a crowdfunding page is not enough—it takes a strategic approach to meet your fundraising goal.

"Crowdfunding is not a ‘set it and forget it‘ proposition," says Jay Strako, Director of Business Strategy at crowdfunding marketing agency LaunchBoom. "Just like any fundraising round, you need to create momentum through great storytelling and constant engagement."

Here are the key steps and best practices Strako recommends:

1. Set your funding goal

Your target should be based on your actual needs and ability to fulfill rewards. Consider starting with a modest goal you‘re confident you can hit, then open up to stretch goals. Choose a timeline long enough to gain momentum but with some urgency (30-60 days).

2. Create an engaging pitch

Storytelling is key. Your video should concisely explain what problem you‘re solving and why it matters, while building an emotional connection. Focus more on the benefits than listing features.
Back it up with attractive visuals, clear product shots/demos, and founder bios that highlight your team‘s credibility.

3. Offer meaningful rewards

For product campaigns, your rewards should give backers insider access at a discount to MSRP. Consider limited-edition/signed versions, bundles, and experiences like a launch party invite or factory tour. Have a range of reward levels (e.g. $25-$5000) to appeal to different groups.

4. Build pre-launch buzz

Start promoting the campaign to your network 1-2 months before launch. Build an email list with a "coming soon" page. Set up social profiles and post teaser content. Reach out to relevant press, bloggers, and influencers. Line up a group of supporters to back the campaign on day one.

5. Keep up the momentum

Getting off to a strong start is important for building social proof and algorithmic placement on crowdfunding sites. Continue promoting the campaign daily through organic social posts, paid ads, email updates, and cross-promotions.
Engage with your backers by responding to comments/messages and sending regular updates. Be transparent about your progress and any challenges along the way.

6. Fulfill your promises

Make good on your promises to backers in a timely manner after the campaign ends. Continue providing updates as you finish development and ship rewards. If you run into delays, be upfront and apologetic. Remember your backers are now some of your most valuable early customers and advocates.

"It‘s not just about creating a great product, but creating an amazing experience for your backer community," says Stako. "These are the people who will propel your brand forward long after the campaign is over."

Crowdfunding Success Stories

Many prominent startups got their start with successful crowdfunding campaigns:

• Oculus VR raised $2.4 million on Kickstarter in 2012 to develop their virtual reality headset, before being acquired by Facebook for $2 billion in 2014.

• Allbirds, now a billion-dollar DTC shoe brand, launched on Kickstarter with a $120,000 campaign in 2014.

• Cruise Automation raised $12 million through an AngelList syndicate before being acquired by GM for nearly $1 billion.

• Glowforge set a 30-day crowdfunding record with their $27.9 million pre-order campaign for a 3D laser printer in 2015.

• MVMT Watches parlayed their $220,000 raised on Indiegogo in 2013 to over $100 million in revenue within 5 years.

While not every campaign is a breakaway success (only about 23% of Kickstarter projects get fully funded), crowdfunding has proven to be a viable option for scrappy startups to raise millions quickly.

The Future of Startup Crowdfunding

Crowdfunding has grown rapidly over the past decade, but where is this industry headed next? Here are some key trends to watch:

• Globalization: Backers are increasingly supporting foreign campaigns, and platforms are expanding to new countries. In 2021, 21% of Kickstarter funding flowed across borders.

• Industry-specific platforms: Niche crowdfunding sites tailored to industries like video games, real estate, and cannabis are starting to crop up. Startups may find more targeted support and success with these specialized audiences.

• Increased regulation: As equity crowdfunding grows, expect to see more scrutiny and rules from the SEC and other governing bodies. Founders will need to be diligent about compliance and investor disclosures.

• Crowdfunding-as-a-service: More startups are turning to agencies and consultants to help execute their campaigns. A new wave of providers offer services from video production to PR to backer management.

• Integration with other funding types: Savvy startups are using rewards campaigns to gain traction before pitching VCs or as a bridge between equity rounds. AngelList now lets you convert backers to equity investors. Expect to see more tools that help founders leverage momentum across multiple funding channels.

Perhaps most exciting is how crowdfunding is empowering a more diverse set of founders to raise capital on their own terms. By leveraging their customers and communities as investors and ambassadors, entrepreneurs can retain more control and access funding that might otherwise be out of reach.

The Bottom Line

Crowdfunding has opened up early-stage financing to a wider range of entrepreneurs and ideas. Whether you‘re launching a physical product, mobile app, or Main Street business, tapping into the power of the crowd could be your ticket to raising the capital you need to grow.

Of course, crowdfunding is not a magic bullet. Successful campaigns take careful planning, hard work, and compelling storytelling. There are risks involved and not every project will reach its goal.

But with the right strategy and execution, crowdfunding offers a unique way to fund your startup while building buzz and a loyal base of early customers. If you have a great idea you believe in, it‘s worth considering how the crowd could help bring it to life.