What is Crowdfunding?
Crowdfunding is a relatively new method of raising capital from a variety of networks, expanding your donor base to fund ideas and projects. It allows a large number of people to contribute and get behind your project, whether you’re working on social causes, product development, research and innovation, or a myriad other worthy initiatives.
Crowdfunding allows projects to expand immensely to other passionate investors that would have otherwise been difficult to reach. Which in turn can make your project happen in a new innovative way.
For example, in 2015 a smartwatch company used crowdfunding to raise more than $20 million dollars from 80,000 people. The potential using crowdfunding is huge if you’ve got the right product and story.
How it Works
Each campaign starts with a simple goal to raise a certain amount of money within a fixed number of days. Companies reach out to their direct network–these are their 1st-degree connections–both to raise funds, and to get their project pushed out to their connections’ connections (2nd-degree connections). This process continues to an ever-increasing degree of connections. The further out you can reach, the more successful your campaign will be.
Typically, the most successful companies receive 25-40% of their revenue from 1st- to 3rd-degree connections. Once the project gains more awareness and attraction, other potential investors will start to support the campaign.
A successful campaign will also depend on choosing the right type of crowdfunding. There are four types: donation-based, rewards-based, equity-based and debt-based crowdfunding.
Donation-Based Crowdfunding
- Disaster relief
- Charities
- Non-profits
- Medical bills
- Product development
Ever given money to charity in need? Or in support of an innovative idea that interested you? Chances are you contributed to a donation-based crowdfunding campaign. Donations tend to be given in small amounts by supporters, with the expectation that the donors are not getting incentives in return.
Rewards-Based Crowdfunding
- Individuals contributing gain a ‘reward’ (e.g. a form of a product or service a company offers)
- Companies can increase contributors but without losing ownership
- Generally used for start-ups
- Anyone can contribute
- Companies tend to offer pre-orders and custom incentives
- Typically raising less than $50,000
Individuals who contribute to this form of crowdfunding gain incentives. This is a great way to give your investors a small thank you without breaking the bank. It’s a win-win situation.
Equity-Based Crowdfunding
- Contributors become part-owners of the company
- Trading capital for equity shares
- Financial return for investment
- Receive share of the profits in the form of dividend or distribution
- Typically raising $50,000 to $10 million
- Done through registered portals that must meet certain criteria
This is one of the riskiest crowdfunding methods, however it provides investors with a chance to enter private-equity markets and diversify their portfolios. In 2015, the United States changed their regulations, allowing anyone to invest in a campaign, with some restrictions.
Debt-Based Crowdfunding:
- Investors lend money with a promise of their money being returned with interest
- Investor submit amount they want to invest and interest of return
- Once filled, final rate of return is calculated using an average of all bids submitted
- No banks involved
- Loans agreed faster
- Generally requires:
- Good credit history
- Solid Financials
Debt-based crowdfunding allows a group of people to lend funds to individuals and businesses. After which, investors would gain interest with steady repayments with low interest. This form of crowdfunding is best for companies that have assets and cash flow to service the loans. Risks are significantly less in comparison to equity-based crowdfunding.
For Canadians, the crowdfunding regulations can vary by province. Equity-based crowdfunding must be done through a web portal that is specifically-made for this kind of financing. Investors must meet all conditions set forth in one of two exemptions.
The first exemption, Startup Crowdfunding Exemption, is referred to as “small exemption” or “junior exemption”. This is the easiest to implement because there is no requirement to provide financial statements. An issuer can give a maximum of $250,000 per campaign (maximum of two campaigns per year). An individual investor can raise a maximum of $1,500.
The second exemption, Regulation Respecting Crowdfunding Exemption, is more strict, but it has a higher financial ceiling. The maximum for the issuer and their members is $1.5 million. For individual investors, it is $2,500 and for more qualified investors the maximum is $25,000. However, in Ontario individual investors have a maximum of $10,000 and for more qualified investors it is $50,000. The issuer and the individual investors must provide financial statements, and the system is open to reporting issuers.
How is Crowdfunding used?
Crowdfunding can be applied to wide variety of projects which is why so many industries use it, including the Education, Healthcare, and Arts & Culture sectors. There is no inviolable rule that says something can or cannot be crowdfunded. The crowd will determine the success of the idea or project.
Universities and Colleges
If you attended University or College, did you join a team or club? You may be familiar with the lack of funding for many extracurricular activities. This is why crowdfunding has been used for student organizations. The same problem can afflict research projects and social causes. Crowdfunding projects are an easy, cost-effective way to enhance existing departments or organizations.
And unlike traditional fundraising activities, crowdfunding allows you to expand the reach of your campaign, promote the good work done on campus and raise far more money, more quickly.
On campuses throughout North America, the value of crowdfunding is well-established. So much so that Suffolk University’s Sawyer Business School in Boston offers a course teaching students the importance of crowdfunding. Within the course students oversee their own Crowdfunding campaigns.
Healthcare
Some of the most innovative research and product development is happening in the healthcare industry. There are projects to provide greater connections between healthcare providers and their patients; there are products that provide people with information to live a healthy lifestyle; there are projects that are bringing new treatments and producing better patient outcomes.
These types of projects are perfect for crowdfunding. Everyone is touched by health issues in some way, and an effective crowdfunding campaign will get your project in front of people who want to support innovations in medicine, healthy living and patient care.
CureCrowd is a medically guided search engine that allows users to find authentic evaluation and answers for medical treatment. It takes online searches beyond Googling symptoms are scouring WebMD for possible ailments. It’s a better method of researching your personal health concerns. This was a company that used crowdfunding to develop their project.
Another effective crowdfunding story is Eve Medical. Throughout the history of medicine, research and treatment has not always focused on the specific health needs of women. Eve Medical is dedicated to designing innovative, user-centered medical products specifically for women.
Arts & Culture
Arts & culture is a popular space for crowdfunding. Whether you need to backing to produce a movie or record an album, or you need funding to support a theatre or art installation, crowdfunding can be a powerful tool to get your project out in front of patrons who want to support the arts.
In August of 2013, a crowdfunding project called Virtual Choir was launched. The purpose was to bring individual singers around the world together. Singers sent in their own tape, which was later edited to be played at the same time creating a unifying choir-like experience. The performance also included a video of art and sketches sent by other artists.
Have a Product or Project that is Innovative?
If so, it’s time to get crowdfunding. There are just so many projects out there that exist because they were able to get sufficient support through a successful crowdfunding campaign. It’s a proven method for getting a product or project off the ground.
Tio used crowdfunding to create an a eco-friendly toothbrush. It is made of bioplastic materials, giving it a smaller carbon footprint than your standard toothbrush.
The Wellbe used crowdfunding to develop an app and heart-rate monitor that alert you when you’re experiencing too much stress. It also keeps track of the people you’re with and rates your stress level with them. It indicates your stress triggers and offers personalized stress programs.
Your project can be the next success story.
Regardless of who you are, raising funds for new projects and ideas can be expensive and hard–even at the best of times. It can be challenging to go to the bank for a loan to get you started or find the capital within your company to fund that new project. This is just part of the reason why crowdfunding might be a great tool for you.
Reach out to us to find out more. We like helping passionate people meet their goals, and we can help you with the crowdfunding platform, campaign marketing and research.
How to Fund for the Arts
Stay tuned for the next blog!