Basics of Crowdfunding

A long history

Crowdfunding was born in 1885.

Joseph Pulitzer was a crowdfunding pioneer. In 1885, he launched a campaign in New York to raise money for a granite pedestal base befitting the Lady in the Harbor proudly raising her torch. Pulitzer, the famed publisher of The New York World, sought to raise $100,000 in small increments from the crowd. His goal was to keep the Statue of Liberty in New York. Placing an ad on the front page of his newspaper, Pulitzer successfully raised $101,091 in five months. The base cost $250,000 (over $6 million today) and Pulitzer’s successful crowdfunding helped fill the gap in funding.

Characteristics this campaign had in common with today’s crowdfunding efforts include the speed in raising the money; the number of small donations and the management by one agent. Rewards such as gold coins were offered to large donors. The biggest difference, thanks to the internet, is the massively larger number of people who can be asked to participate today.

What is crowdfunding?

Crowdfunding is the practice of money from a large number of individuals each giving small amounts.

There are four types:

1. Donor-based, with no expectation of a return or reward.

2. Reward-based, which gives an expectation of some type of reward. These rewards are specified in advance and depend upon the amount given. Popular examples such as Kickstarter and Indiegogo are reward-based platforms.

3. Equity-based, which involves buying shares and entails a fiduciary responsibility between the person giving the funds and the person receiving the funds.

4. Lending-based, which is basically a loan agreement. This has been used in the mortgage markets, where someone has a facility they want to finance.

How much can you raise?

An example of one of the largest crowdfunding success stories occurred in December 2012. Oculus Rift, an immersive virtual reality gaming headset, was crowdfunded on Kickstarter and raised $2,437,429.00 from 9,522 backers with an average contribution of $256. Their goal was to raise $250,000. Sixteen months later, the company was acquired by Facebook for $2 billion.

There are approximately 185,000 crowdfunding campaigns a year, and the industry is still considered to be in its infancy. Crowdfunding will raise about $60 billion this year and is expected to top $90 billion by 2020, a 50 percent increase in three years. According to reliable statistics, approximately 36 percent of Kickstarter campaigns reach their financial targets. Yet 84 percent of all campaigns raise under $10,000. According to Montelione, “Use crowdfunding to get your project going. You can always do a second round to help you get to the next level.”

“Use crowdfunding to get your project going,” Montelione said. “You can always do a second round to help you get to the next level.”

Creating a crowdfunding project

The four-step process needed to successfully crowdfund include:

1. Have a mission.

2. Reach out to the crowd.

3. Find believers in the project.

4. Create a movement.

Managing a crowdfunding project

“You must know what teams you need to be successful. Hire contractors to build your website and handle your social media if you don’t know how. Gain backer support from friends and family. Have a business plan and an accounting system.”

He suggested starting a blog to get the word out. There are so many ways to reach your tribes today, especially using social media channels such as Facebook, Twitter, and Instagram.

Create your product page

This step is critical to your success. Establish a realistic funding goal. If the crowdfunding platform states a fixed goal, then you need to raise the entire amount or you don’t get a cent. If the platform has a flexible program, you get to keep whatever money is raised, regardless of reaching your goal.

Create a professional-quality video. Use an “elevator pitch” to tell your story. Explain what you will do with the funds raised.

Arrange credit card processing, keeping in mind that you will only keep $.85 to $.90 cents out of every dollar after paying credit card and platform fees.

Add a thank you note and communicate your progress with your followers.

If you are thinking of crowdfunding a project, selection of the best platform is crucial, so choose wisely.

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