Crowdfunding is the method of soliciting large numbers of people to fund a given project or enterprise. Projects range from tiny business startups requiring a few thousand dollars to feature films requiring hundreds of thousands.
People sometimes refer to this as crowdsourcing, but that more aptly describes seeking a large number of workers to collaborate on and complete a particular project, often split into multiple smaller tasks or designed as a contest with multiple entrants. While money can be raised via crowdsourcing, it is designed more around saving money and blending ideas. Crowdfunding, on the other hand, is where the real money can be raised.
The two largest sites of this type are Kickstarter and Indiegogo, although there are many other smaller sites from which to choose. Both are philanthropic in nature – investors are offered "perks" such as individual copies of a crowdfunded album or book, but investing for equity or soliciting for loans is not allowed.
Kickstarter and Indiegogo have several differences, but the major one is the approach to goals. Kickstarter uses an "all-or-nothing" model – either the project raises the target amount of money in the targeted time and proceeds, or it doesn't and there is no money accepted toward that project. Indiegogo allows projects that are partially funded to proceed. Most other sites are variations upon one of these themes.
Regardless of which approach you prefer and which site you use, a few fundamental aspects increase your chance of success.
- Proper Cost Assessment – Many startups fail because they cannot realistically assess costs, but instead optimistically shade their estimates. Get some objective opinions as you assess your costs so you ask for a realistic amount to complete your project. Don't forget about the fees that the site will charge, typically a percentage of funds collected – and remember, this is all taxable income.
- Solid Business Plan and Timeline – Construct your business plan with the same rigor as If you were going in to a bank to secure funding (or, if you prefer, into the "Shark Tank"). Completing the project is great but you need to show the path to a profit. A realistic timeline is also important – according to a 2012 report from Wharton, 75% of Kickstarter inventions missed their launch dates.
- Compelling Post and Description – As people browse projects, they will see an image that you post with a very short description. The first step is to catch an investor's attention with that initial post. It must be compelling enough to make them click further to see more. Think like this – if it were posted in a window, would it compel somebody walking down the street to stop and look at it? If not, try again.
Once people reach your full description, include all of the details that are relevant to your project – which will vary greatly depending on what your project is. It is best to look up similar projects on multiple sites to get an idea for typical presentations, and then think about how you can stand out from them.
Aside from these things, the other elements you need to make money from crowdfunding are the passion, drive, and work ethic to see your goals through. Jamey Stegmaier of Stonemaier Games said, "If you go into a Kickstarter project with making money as your one and only goal, there's a decent chance you will fail."
Equity crowdfunding is not allowed at all in the US – yet. It was included in the 2012 JOBS (Jumpstart Our Business Startups) legislation, but the SEC is gumming up the works. They eventually released proposed rules but seem to be in no hurry to finalize them, as we are now in the third year of waiting and the most optimistic estimate for finalized rules is early autumn.
Eventually, this will change and we will have new ways to make (and in this case, lose) money via crowdfunding – if equity crowdfunding isn't regulated into insignificance. Even so, the basic principles to success will be the same. It is all about providing a useful product or service, and communicating your message well.