What is crowdfunding, anyway?

We’re all familiar with traditional fundraising.

It comes in myriad forms: from humble bake sales, to sponsorship programs, to subscription programs, to dinners and giant galas.

Throughout the years, traditional fundraising has been a lifeline for both corporations and non-profits. At the same time, a shift in communication methods, and giving culture means it is showing diminishing returns.

Crowdfunding is an umbrella term for 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 support you, financially or otherwise, whether you’re working on social causes, product development, research and innovation, or a myriad other worthy initiatives.

Crowdfunding allows word of your project to reach passionate investors that would have otherwise remained too far out of your network, or even your awareness. The impact of this can be huge.

For example, in 2015 a smartwatch company used crowdfunding to raise more than $20 million dollars from 80,000 people. The potential of crowdfunding is almost limitless, for the right campaign.

How does crowdfunding work?

A campaign refers to a set project. For example, rebuilding a community after a natural disaster; the rehabilitation of rescued animals; providing education for a child, or a school for a set period of time; or covering medical expenses.

Each campaign runs for a certain number of days, with a target goal amount. Companies reach out to their direct network (these are their first degree connections), both to raise funds, and to get their project pushed out to their connections’ connections (second degree connections).

This process progressively widens to span a huge network. The further the reach, the greater the impact.

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.

What are the advantages of crowdfunding compared to traditional fundraising?

Regardless of who you are, raising funds for new projects and ideas can be expensive and hard – even at the best of times.

It’s notoriously challenging to get a loan from the bank if you’re just getting started, or even securing capital from within your company to launch a pilot project. This is just part of the reason why crowdfunding might be a great tool for you.

What are the different types of crowdfunding? 

Despite its potential, for newcomers, crowdfunding can sound like a risky bet.

But the power of the internet and the increased acceptance of the validity of individual campaigns (as opposed to the overall big name of an organization) has made it a powerful (and sometimes necessary) tool.

Running a successful campaign isn’t a gamble. A project’s success depends on the goals, the stories, and the construction of the campaign.

Additionally, it hinges on choosing the right type of crowdfunding. There are four types: donation-based, rewards-based, equity-based and debt-based crowdfunding.

Types of 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 intriguing project? Chances are you contributed to a donation-based crowdfunding campaign.

Donations tend to be given in small amounts by supporters, without the expectation of incentives or reward.

Rewards-Based Crowdfunding

• Contributors are somehow rewarded (e.g. a form of a product or service a company offers)
• Companies can increase their number of contributors, without relinquishing any ownership
• Generally used for start-ups
• Anyone can contribute
• Companies tend to offer pre-orders and custom incentives
• Typically raise less than $50,000

This is a great way to give your investors a small thank you without breaking the bank. A win-win situation.

Equity-Based Crowdfunding

• Contributors become part-owners of the company
  • Trading capital for equity shares
  • Financial return for investment
  • Profits are shared with contributors though dividends or distribution
• Typically raise $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 the expectation of repayment with interest
  • Investors submit amount they want to invest, and interest
  • Once filled, final rate of return is calculated using an average of all bids submitted
• No need to involve banks
• Expedited loan agreements
• Generally requires:
  • A 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, crowdfunding regulations can vary by province. Equity-based crowdfunding must be done through a web portal 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 (with a 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.

Have a product or project that is innovative that needs backing?

If so, it’s time to get crowdfunding.

There are so many great and interesting projects that exist solely because they were able to garner support and momentum through a successful crowdfunding campaign.

Tio used crowdfunding to create an a eco-friendly toothbrush 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 alerts you when you’re experiencing excessive stress. It also keeps track of the people you’re with, and rates your stress level when around them. After a while, it identifies your triggers and offers personalized stress programs.

Your project can be the next success story.

Reach out to us to find out more. We not only provide a platform, but we can show you how to create a crowdfunding campaign and guide you throughout the process with personal support, expert advice, and toolkits and resources with a wealth of information.

We love helping passionate people meet their goals, and we can help you with the crowdfunding platform, campaign marketing and research.  Reach us at letsgetstarted@makegivinghappen.com !