What Is Crowd Sourced Funding and Why Should You Care?

What Is Crowdsourcing?

Crowd sourced funding is an alternative method of funding projects by obtaining small donations or pledges from a collective group of donors or investors.

All these smaller amounts of money can add up to sizable sums (in many cases), and this type of collective funding raising can be used for a wide range of endeavors such as non-profit fundraising, independent production of books, movies and other intellectual works, or even new business start-ups or inventions.

Both non-profit and for-profit efforts can benefit from leveraging crowd sourced funds.

Donate button on mobile phone

How Does It Work?

There are approximately 500 crowdfunding platforms worldwide according to Crowdsourcing.org., and most individuals who decide to go the crowd funding route opt to use the services of one of these platforms. 

Depending on the chosen platform, those seeking investment funds do tasks such as:

  • Create a project
  • Set their goals
  • Determine the rewards or incentives for supporters
  • Design and implement their advertising campaign
  • Establish a start and end date for the fundraising
  • Oversee the crowd sourcing effort

Specific guidelines vary from platform to platform, so individuals wanting to crowd fund a project will need to do a little legwork to find the right platform to match their project, but with so many options from which to choose, there is bound to be a perfect fit for most.

There are three methods of crowdsourcing funds:

  • Donation Based: Donors receive something of value (an expression of gratitude or some tangible reward) in exchange for their support.
  • Equity Based and Lending Based: Supporters receive a legally-allowed monetary return on their investment.

Note: Equity based crowdfunding is legal in the United Kingdom, but at the time of this writing, US legality appears to be pending the SEC’s release of the implementing rules for such funding in accordance with the Jumpstart Our Business Startups (JOBS) Act. However, most experts agree it should become a reality in 2013, and there are many equity based crowdfunding platforms poised in the ready position.

Who Can Use Crowd Funding?

Crowdfunding levels the playing field for smaller non-profits that might otherwise struggle or be unable to raise the necessary funds for their projects. Independent publishers and freelancers also benefit from this alternative financing method. However, crowd funding is not limited to these smaller endeavors and almost anyone or any organization can find a crowd funding platform to suit their needs.

As an example, an aspiring author could use crowdsourced funds to pay for services needed to publish a book such as cover design or professional editing services which he or she could not otherwise afford. In return, the author might offer autographed copies of the books as one of the incentives for donations to the project.

Look Before You Leap

While there are obviously many advantages to using crowdsourcing to leverage fundraising efforts to maximum benefit, there are some disadvantages.

For instance, what percentage of the collective funds will need to be paid to the crowdsourcing platform? As an example, according to their website, Kickstarter charges a 5% fee on the amount of collected funds of successfully funded projects.

What happens if your project doesn’t meet the funding goals? Again, while specific guidelines vary from platform to platform, many of these operate on an “all or nothing” model. If the funding doesn’t reach goal, investment monies are returned. While this lowers the risk for the supporters, how would it impact your project or goal?

Some other questions about crowd sourced funding to ponder are:

  1. Will you be jeopardizing your copyrights in any way?
  2. Are you willing to sacrifice confidentiality, especially on intellectual properties?
  3. What happens if your project has cost overruns, or you underestimate miscellaneous costs such as shipping?

3  Crowdfunding Sites to Evaluate

With over 500 crowd funding platforms in operation, it would be nearly impossible to review all of them. However, there are some names that appear with regularity if you do an Internet search on “crowdfunding platforms,” and while that doesn’t guarantee these sites are the best of the best, it does speak to their positioning in the marketplace.

  1. Kickstarter: Kickstarter is a crowdfunding platform for creative projects, and they operate on the all-or-nothing model. Project creators can work through their Kickstarter school if they need help setting up their projects.
  2. Fundable: Fundable offers start-up companies a way to raise investment capital by offering rewards or equity in exchange for funding. Getting started is free, but it costs $99 per month to fundraise. However, no fees are assessing on the collected funds.
  3. Indiegogo: Sign up and donate or create a fundraising campaign for free. Indiegog offers two fundraising models: flexible funding or fixed funding.

Flexible funding: Indiegogo charges a 9% fee on collected funds with a 5% rebate to the campaign creator if the funding goal is met (net fee of 4%). However, unlike an all-or-nothing model, if the goal is not met, the campaign creator keeps the collected funds minus the nine percent fee.

Fixed funding: Indiegogo collects a 4% fee on collected funds if the fundraising goal is met. If goal is not met, the campaign creator gets nothing and investors get their funds back.

On both models, Indiegogo also charges some other fees such as those for processing credit card transactions or currency exchange fees. Platform fees are reduced by 25% for qualified 501(c)(3) non-profit organizations.

(Information on fees based on data collected from individual websites and is deemed to be accurate at time of writing.)

Whether you choose to go the crowd sourced funding route or rely on traditional fundraising methods to funding your non-profit or for-profit efforts and projects, it always pays to do your due diligence before making your final funding plans. Make sure you understand all the risks versus rewards of any method you’re considering, and make your final decision based on facts rather than emotion.  

Resources:

Crowdfunding Industry Report: Market Trends, Composition and Crowdfunding Platforms, May 2012

Kaplan, Marcia, “Equity Crowdfunding Is Now Legal In the U.S.,” April 10, 2012, Practical eCommerce

Image courtesy of Stuart Miles / FreeDigitalPhotos.net