Crowdfunding Explained: Small Contributions Add Up
Crowdfunding is the practice of raising a small amount of money from a large number of people. The money raised is used to fund a specific project, collect general donations, or drive support for a time-based initiative.
As the saying goes, small things, done consistently, can add up to big things over time.
While a crowdfunding and a peer-to-peer fundraising campaign share the common goal of raising money, they have many differences. The primary difference between crowdfunding vs peer-to-peer fundraising is how the funds are solicited. The main call to action for a crowdfunding initiative is to donate. The purpose of peer-to-peer fundraising is to call supporters to fundraise on behalf of an organization.
Crowdfunding Use Cases
Depending on your unique goal, how you conduct a crowdfunding campaign may differ. Below we break down the most common applications of crowdfunding and how to successfully bring each strategy to your organization.
Demonstrated by global giving initiatives like Giving Tuesday, crowdfunding has proven its impact on the long-term health and sustainability of nonprofits worldwide.
A crowdfunding campaign is built to inspire support for your cause with a robust narrative that ultimately drives people to make a gift. It consists of a campaign landing page that highlights your impact to draw people in, and a donation form to simplify the transaction process.
Crowdfunding campaigns are a great way to create a sense of urgency with your target audience and motivate immediate action. A few common nonprofit crowdfunding applications include:
- General donation fund
- Time-bound project
- Disaster relief
Crowdfunding supports impactful scientific research that may otherwise be impossible. Capturing the interest and backing of thousands of individuals willing to donate has the potential to significantly change the way science evolves in the future.
Researchers pitch a proposal to garner support through a crowdfunding page. Patients, medical professionals, and individuals with a strong belief in a specific area of science can contribute to the project by simply donating online. Broad support allows for greater intellectual freedom and independence and provides scientists with an opportunity to build credibility.
Just look at the Gray family who was devastated by both of their young daughters’ 2015 diagnosis of the fatal and incurable Batten Disease. They turned to crowdfunding to accelerate research in three promising treatment options.
With $1 million dollars, the family would be able to hire a team of doctors and scientists committed to conducting research to treat the rare disease. Since its start, they have raised $2.5 million and counting and have started FDA filings for a clinical trial.
Rather than depending on traditional funding sources, startups can capitalize on the support of friends, family, entrepreneurs, and individual investors to get their business off the ground.
Crowdfunding makes it easier for startups to amass a sizable amount of capital and market their new business to larger audiences. Every investor wants to see a company do well when their finances are involved. That usually makes them eager to spread the word about the things you’re working on.
These organic conversations lead to greater awareness of your brand, which could motivate other investors to get on board or encourage future customers to purchase your products or services.
Startups typically offer investors something in return, most commonly through rewards-based or equity crowdfunding. They use social media and a crowdfunding website to educate both primary and extended networks about the opportunity to fund an emerging business. Doing so provides a highlight of the perks and incentives people will receive in exchange for their support.
Oculus, the wildly popular virtual reality headset, got its start on a crowdfunding site. Within four hours of launching the campaign, they achieved their goal of $250,000 and went on to raise $2.4 million.
3 Types of Crowdfunding
Crowdfunding is used most commonly by startup companies or growing businesses, as well as nonprofit organizations raising money for worthy causes. Although these organizations are all working toward the same end result, the type of crowdfunding they’re applying is different. Below, we break them down to help you understand which applies to your organization.
1. Rewards-Based and Equity-Based Crowdfunding
When someone contributes funds in exchange for something, it falls into the rewards-based crowdfunding bucket. This is typical for startups that might offer free swag or a discounted service.
2. Equity-Based Crowdfunding
Equity-based crowdfunding is similar to rewards-based crowdfunding. It allows small businesses or startups to give away a portion of their business in exchange for funding.The contributors will become part-owners in your company and ultimately receive a share of the profits.
3. Donation-Based Crowdfunding
The simplest type of crowdfunding is donation-based crowdfunding, which means someone gives money for nothing in return. While seemingly lackluster for the donor, this xtype of crowdfunding can be extremely rewarding. It attracts loyal supporters who are passionate about your work, which we see happen year after year across the social sector.
How Crowdfunding Works
At a basic level, crowdfunding is a team effort to support a specific goal. It could be used to help a business owner get their startup get off the ground, or even fund nonprofit relief efforts when disaster strikes.
In general, crowdfunding is composed of four steps:
- Platform Selection
- Platform Acceptance
- The Pitch
- Receiving Payout
With these action items in mind, it’s important that your target audience remains at the center of each decision. Regardless of your goal, the key to crowdfunding success is engaging the right people in meaningful ways.
Start by identifying who you’re talking to. From there you can confidently craft your strategy to align with those supporter preferences, tendencies, and behaviors.
1. Selecting a Crowdfunding Platform
When it comes time to choose between crowdfunding platforms, the process can be overwhelming. We’ve broken it down into three simple recommendations.
Evaluate the Fundraising Platform’s Pricing and Fee Structure
- Credit processing fees. A small percentage of each monetary gift made to a crowdfunding campaign goes to the platform that hosts the campaign’s processing service. That fee covers the cost of transmitting the data, authorizing the transaction, and depositing the funds. Look for a site that offers benefactors the choice to cover the processing fees themselves to avoid missing out on impactful fundraising dollars.
- Percentage platform fees. While the exact percentage taken in processing fees can vary from platform to platform, it’s important to know that they are often calculated and deducted from the total amount of money you raise. This is how crowdfunding platforms make most of their revenue. Carefully consider how this deduction from your funds could impact your fundraising goal.
Investigate Ease of Use and Customization Options
- Ease of use. Time is our most valuable asset. Make sure you’re looking for a fundraising platform that keeps things simple. The less time you have to spend building, updating, and optimizing your crowdfunding campaign page, the more time you have to raise money.
- Customization options. Consistent branding on your crowdfunding campaign helps create an identity for your organization. It shows who you are, what you stand for, and how this particular crowdfunding initiative will help sustain your good work. Advanced customization options allow you to easily communicate your values, clarify your call to action, and tell your brand story in a way that resonates to anyone who visits your online campaign.
Identify Available Resources and Customer Service Offerings
- Accessible resources. The key to success is having the right tools. Explore each potential fundraising platform’s site to look for online tutorials, resource guides, or even a list of up-to-date FAQs. These easily accessible resources can be a major source of time-savings throughout your crowdfunding campaign.
- Attentive customer service. If you run into a problem in the creation or launch phase of your crowdfunding campaign, you’ll want the comfort of knowing that someone is there to help. Try contacting customer support before you select a fundraising platform to ensure their support team is both helpful and responsive.
2. Getting Accepted by a Fundraising Platform
While this isn’t always the case, certain platforms may require you to fill out a set of online forms and provide documentation prior to being accepted to host your crowdfunding campaign on their site. This process ensures that you’ve met the platform’s creator requirements and are going to use it how it’s intended.
Requirements vary from online platform to platform, but here are a few examples:
- You are 18 years of age or older
- You are a permanent resident of one of the eligible countries
- You have an address, bank account, and government-issued ID based in the country you’re creating the project in
- The linked bank account belongs to the person who verified their identity for your project
- You have a major credit or debit card
3. The Pitch
Once a fundraising platform accepts you, you’ll be asked to pitch your project to their team to ensure it’s a good fit. What are you trying to accomplish? How much are you hoping to raise? How do you plan to solicit support?
Prepare for this pitch by proactively identifying your campaign narrative and laying out your marketing plan. Think of the pitch similarly to promoting your organization through word of mouth, social media, and paid ads. It’s your opportunity to sell your story and garner support.
4. Receiving Payout From Your Crowdfunding Campaign
This is where all of the research you did prior to selecting your crowdfunding platform comes into play. Some platforms will payout all of the money you raised during your campaign regardless of the final total, while others may only offer payout if you hit your funding goal. The pricing and fee structure also plays a large part in the percentage of funds that will actually land in your organization’s bank account once the campaign wraps.
With the ultimate goal to raise as much money as possible, be sure that the platform you select doesn’t have any fine print that could interfere with your success.
When you’re looking for people to help fund a new project or business venture, it’s critical that the transaction process is as seamless as possible. Social media is a great place to raise awareness, but finding the right fundraising platform to convert supporters into donors or investors is critical.
Below we’ll break down the top fundraising platforms to help you understand what makes each site unique.
For Nonprofits – Classy.org
Made for nonprofits, Classy’s crowdfunding platform allows charitable organizations to create evergreen microsites that simplify the donation experience and maximize conversions.
Easily customize campaigns with a complete set of advanced design tools to communicate a clear mission. Offer flexible payment options, manage online donor activity with ease, and take the stress out of the tax preparation process with Classy.
For Personal Funding – GoFundMe
Best for personal fundraising, GoFundMe is a versatile platform that helps individuals raise money for everything from medical needs to emergency response.
With the goal of helping individuals craft and share their story in just minutes, the GoFundMe platform makes it simple for families and communities to receive the funds they need to get back on their feet quickly.
Complete with a 0% platform fee, this site can help individuals reach their fundraising goals to offer support in trying times.
For New Business – Indiegogo
If you’re looking to launch a new business idea or product, Indiegogo offers the tools to set up a 60-day campaign to help raise funds and garner support. By giving entrepreneurs a platform to introduce clever or unconventional products to the world, this site fuels innovation.
Indiegogo’s crowdfunding campaigns give entrepreneurs a platform to get curious and creative, and provides early backers a place to discover groundbreaking products before they hit mainstream availability.
For Creatives – KickStarter
Kickstarter is a place for creatives to share their visions with communities that will support them. No matter how big or small, the platform wants to help creators of all kinds, including filmmakers, artists, musicians, designers, and more. They can easily spread the word about their new projects and welcome backers to become part of the magic.
Common Crowdfunding Questions
Q: How much money can you make through Crowdfunding?
A: The amount of revenue a crowdfunding campaign will generate varies from hundreds to millions of dollars depending on multiple factors.
On average, crowdfunding campaigns that successfully reached their goals raised $28,656 with an average pledge of $96. When we look at all crowdfunding campaigns, rather than just a successful crowdfunding campaign, the average raised is $824 with a pledge size of $88.
Crowdfunding is projected to grow by $300 billion by 2030 so we can expect that these averages will continue to fluctuate.
Believe it or not, America’s first major crowdfunding project dates back to the summer of 1885 when the Statue of Liberty was shipped in pieces from France, awaiting assembly. Americans were unable to raise the $250,000 they needed for a granite base to the statue until the launch of a fundraising campaign in The New York World newspaper.
Q: What’s the difference between Peer-to-Peer and Crowdfunding?
A: The primary difference between crowdfunding vs peer-to-peer fundraising is the call to action.
Crowdfunding campaigns are versatile appeals for your community’s support with the main call to action to donate. A peer-to-peer campaign invites supporters to fundraise on behalf of your organization to reach a larger audience.
Both include the option to complete a one-time donation, but the goal of a peer-to-peer page is to recruit individuals who will appeal to their personal networks.
Q: How do Crowdfunding Campaigns work?
A: Crowdfunding is the process of raising money from a large number of people to fund a project, new business venture, product launch, or worthy cause. Crowdfunding campaigns are typically conducted online through a fundraising site and intended to garner support to achieve a set fundraising goal.
Q: How do I tell a good story for a Crowdfunding Campaign?
A: Storytelling is a huge part of creating meaningful connections with supporters. Rather than simply informing people about why your campaign is important, create a felt experience with sensory, descriptive language.
Keep your text short and include compelling imagery, like photos or video. Clarify the tangible impact of each contribution and focus on one clear call to action that will drive conversions.
Q: What is a Crowdfunding Quizlet?
A: If you’re hoping to learn more about crowdfunding, a set of flashcards might just do the trick. A crowdfunding Quizlet is a free learning tool you can use to familiarize yourself with the topic while reviewing flashcards, playing games, or creating study sets to take with you on the go.
Ready to Start Crowdfunding?
Crowdfunding is a central fundraising model worldwide. These campaigns serve as both a tool to bring personal projects to life and a powerful way for impactful organizations, creators, and businesses to share their stories. It can help fund programmatic and operational initiatives with the support of an extended network.
Tell your story and inspire support for your cause with Classy’s conversion-optimized crowdfunding campaigns and give your mission the recognition it deserves.
Checklists for Crowdfunding, Peer-to-Peer, and Event Fundraising Campaigns
Subscribe to the Classy Blog
Get the latest fundraising tips, trends, and ideas in your inbox.
Thank you for subscribing
You signed up for emails from Classy