Crowdfunding: Financing for the Masses

Crowdfunding: Financing for the Masses

The ability to raise capital funds to develop an idea or support a cause has traditionally been limited to friends, family, and one’s own pockets.  The introduction of crowdfunding applications has opened up the door for entrepreneurs and fundraisers to seek financial support from complete strangers utilizing one of the most influential developments in the internet era: social media. Crowdfunding refers to a process by which an individual solicits investments or donations for the development of an idea or project or the support of a cause (Chen, Thomas, & Kohli).  

These investment platforms are managed by private websites that facilitate the presentation of ideas by entrepreneurs and the investment of money from consumers.  This unique conceptual design has allowed thousands of individuals to develop projects ranging from books and technical inventions to medical treatments and financial support for victims of crime. Although fairly new in practice, crowdfunding isn’t a unique idea as historically people have been forced to involve multiple small investors to pursue their ideas due to lack of large-scale financial backing. However, the power of the internet, and specifically social media, has expanded the reach of crowdfunding exponentially. 

Concept Design

The majority of crowdfunding applications and websites are built upon the same business model. The sites are largely absent of fees to browse, submit ideas, and invest in projects. The only time money changes hands is when someone makes and investment.  The site acts as a mediator between investors and entrepreneurs.  When an individual makes the decision to invest in a project or cause, they choose an amount and send the funds via an online payment portal. The crowdfunding site receives the funds and holds them until they are disbursed to the entrepreneur. Once the fundraising round is complete, the money is then given to the entrepreneur.  The crowdfunding site may take a percentage of the money raised as their fee for facilitating the transaction. 

Each site has its own rules and regulations regarding what types of projects can be pitched, limitations on investment, fundraising goals, and investment incentives. These regulations can be a bit tricky to navigate and it is important to review the information before deciding on a specific site for fundraising.  The success of the campaign depends on several variable factors, some of which can be mitigated by designing the investment pitch to match the target audience, utilizing alternative advertising methods, and differentiating factors can all be modified to increase the chance of success. 

Top Three Sites

A quick google search yields dozens of crowdfunding options. However, there are three applications that receive fairly consistent media attention and account for the majority of crowdfunding campaigns.  These sites are constantly changing and have highly interactive user interfaces. The three most common fundraising sites are: (a) GoFundMe; (b) Kickstarter; and (c) Indiegogo. 

GoFundMe

Claiming to have raised over $2 billion worldwide, GoFundMe is one of the most commonly used crowdfunding platforms ("GoFundMe: #1 for Crowdfunding & Fundraising Websites").  The platform utilizes a dual fundraising system which distinguishes personal and charity fundraising. This is important because each type of crowdfunding campaign has different rules, regulations, and fee structures attached. Personal fundraising is the use of the platform to collect money for things like unforeseen events, illness, education, and numerous other options. Charity fundraising is the use of the platform to support a previously determined charity, of which the site has thousands to choose from with each campaign. The major difference between the two is the treatment of the funds in relation to both the fee structure and the receipt of the money collected.

In the United States, the GoFundMe rate for service is 5% of the total amount raised for personal campaigns. However, there are additional fees for the processing of each donation in the amount of 2.9% financial processing fee and a flat $0.30 per donation. This means that if a campaign raises $100, the owner could expect to receive anywhere from $62.10 to $91.80 in funds from the campaign. The reason for the range is due to the processing fee of $0.30 and the number of donations it takes to reach the goal. If a campaign receives 100 contributions of $1.00 each, the campaign is charged a $30.00 fee on top of the $5.00 GoFundMe fee and the $2.90 financing charge.  However, if the campaign receives only one donation of $100, the campaign change is reduced to just $0.30.  Once the fees have been determined, the campaign owner can collect the funds. 

The rates for the charity contributions are slightly different from those of the personal campaign. The GoFundMe percentage is a consistent 5% while the financing fee is 4.25%.  This higher financing fee is offset by the lack of fee per donation. Using the same numbers, if a charity were to raise $100, they could expect to receive $90.75. Once the campaign has ended, the money is sent directly to the charity selected based on the tax identification number listed for the organization. 

Kickstarter

The second large crowdfunding site, Kickstarter, is focused on funding projects for entrepreneurs and artists in need of capital investment. It can be extremely difficult for entrepreneurs to find capital to develop their ideas and many do not have the funds to pursue their projects without assistance (Klein, 2014).  This is where crowdfunding platforms such as Kickstarter can help. To date, Kickstarter has facilitated the launch of 106,082 new projects and ideas ("About — Kickstarter"). 

The projects at Kickstarter are classified in one of the dozens of categories including art, film, publishing, technology, games, food, and much more. According to Kickstarter, there are three basic rules that every project campaign must follow: (a) campaigns must be backing a project that produces something that can be shared with others; (b) campaigns must be honest and evidence clearly displayed when needed; and (c) no fundraising for charity or monetary compensation can be offered for investment. Once a campaign meets these criteria, an owner can solicit investments by setting a goal for their campaign. 

A campaign goal on Kickstarter is the amount of money needed to complete the proposed project. In order to gain funding on this application a campaign owner must set and meet the funding goal within the timeline they select.  If the monetary investment goal is received within the timeframe the campaign owner will receive funding. If the requested fund goal is not met, the campaign owner does not receive funds and the investments are returned to the potential backers. Unlike GoFundMe where all contributions are distributed, Kickstarter requires that the full amount is met because the goal of a campaign is to produce something.  If an entrepreneur needs $5,000 to produce a widget, but they only get $3,000 in funding, then Kickstarter will not fund the project due to the likelihood that the project cannot be completed unless the full amount is raised.  

In addition, since the campaigns are funding a project development, campaign owners can offer incentives in order to encourage people to invest. As an example, if the campaign was back a musical project, the owner may offer a signed copy of the CD for investors as a thank you for investing. Many campaigns offer incentives based on the level of contribution. The more a backer contributes, the better the incentive. In this example, a large scale contributor might be invited to a meet and greet with the band or tickets to a concert once the project is completed. The fee structure for campaign owners is similar to GoFundMe as Kickstarter charges 5% for their fee, 3% finance charge, and $0.20 per pledge.  Using the $100 example, a campaign owner can expect to receive anywhere from $72.00 to $91.80. The major difference between the two models is the presence of a micro-processing fee with Kickstarter. If the pledge is less than $10, the financing fee goes up to 5%, but the per contribution charge reduces to just $0.05. In that case, the minimum amount received changes to $85.00, which is $13 in savings for those campaign owners who attract multiple small investors.  This is something that is attractive to campaign owners if they have a wide, target audience for investors. Individuals who have a smaller network of contributors who have larger pockets, might not be such an issue with the available fee structure.

As of 2015, Kickstarter amended its business model to become a Benefit Corporation. This is a type of business entity recognized in many states as a for-profit corporation that doesn’t just concentrate on the bottom line profit but understands there are other impacts that profit can’t bring, such as innovation or positive environmental impact (Rodolico).  This movement seems to be catching on as 30 states have already adopted protections for this type of organization. 

Indiegogo

The third site is Indiegogo, which functions almost identically to Kickstarter. The fees structure and project requirements are the same however, Indiegogo offers one option that Kickstarter does not: flexible funding. Unlike Kickstarter’s all or nothing funding, Indiegogo offers two options to campaign owners: (a) fixed funding which requires a certain budget amount to be raised in order to receive any funds; and (b) flexible funding which leaves the goal amount open ended and allows the campaign owner to retrieve funds as needed ("How It Works | Indiegogo"). Indiegogo also supports campaign owners after their fundraising success by offering additional marketing insights and go-to-market strategy experts to launch new ideas. This continuing support is a bonus of the site that is unique in its design.

Maximizing a Crowdfunding Campaign

No matter what site is used, most of the agree there are several keys to making a crowdfunding campaign successful.  Although crowdfunding is relatively new there are several researchers who have begun launching the first evidence-based practice methods. Vachelard, Gambarra-Soares, Augustini, Riul, & Maracaja-Coutinho note that the most successful crowdfunding campaigns are owned by individuals with large personal and social networks. Additionally, the aesthetic of the campaign is critical to its success. Competition is everywhere and the ability to put together a presentation using multimedia applications such as video, music, and interactive presentations is a must if a campaign is going to meet its financial goals. Estimates show that there is nearly $33 billion in debt, equity, and rewards currently changing hands due to crowdfunding efforts which means huge opportunities if a campaign can capitalize on its concept, audience reach, and marketing (Assenova et al.).

Works Cited

"About — Kickstarter". Kickstarter. N.p., 2016. Web. 23 May 2016. https://www.kickstarter.com/about?ref=footer

Assenova, V. et al. "The Present And Future Of Crowdfunding". California Management Review 58.2 (2016): 125-135. Web. http://cmr.berkeley.edu/browse/articles/58_2/5815/

Chen, S., S. Thomas, and C. Kohli. "What Really Makes A Promotional Campaign Succeed On A Crowdfunding Platform?: Guilt, Utilitarian Products, Emotional Messaging, And Fewer But Meaningful Rewards Drive Donations". Journal of Advertising Research 56.1 (2016): 81-94. Web. http://www.journalofadvertisingresearch.com/content/56/1/81

"Gofundme: #1 For Crowdfunding & Fundraising Websites". GoFundMe. N.p., 2016. Web. 23 May 2016. https://www.gofundme.com/

"How It Works | Indiegogo". Indiegogo. N.p., 2016. Web. 23 May 2016. https://www.indiegogo.com/how-it-works

Klein, Karen. "Funding A New Small Business? Don't Bother With Banks". Bloomberg. N.p., 2014. Web. 23 May 2016. http://www.bloomberg.com/news/articles/2014-02-13/funding-a-new-small-business-dont-bother-with-banks

Rodolico, Jack. "Benefit Corporations Look Beyond The Profit Motive". NPR. N.p., 2014. Web. 23 May 2016. http://www.npr.org/2014/06/18/316349988/benefit-corporations-look-beyond-the-profit-motive

Vachelard, Julien et al. "A Guide To Scientific Crowdfunding". PLOS Biology 14.2 (2016): e1002373. Web. http://journals.plos.org/plosbiology/article?id=10.1371/journal.pbio.1002373