What is crowdfunding? Definition, platforms and tips

Securing funding can be challenging for new entrepreneurs. Bank loans often require collateral or proof of revenue that many startups lack, while venture capital is competitive and can demand significant control over a company.

Crowdfunding offers a viable alternative to traditional financing. It enables business owners to raise money from a large audience and build a community of loyal supporters.

This article will answer the question: “What is crowdfunding?” You’ll learn about the different fundraising models and discover top crowdfunding platforms for funding your business. Finally, you’ll get five tips for creating an effective campaign.

What is crowdfunding?

Some business owners use crowdfunding to secure capital for a startup, while others aim to launch new products or expand their existing services. Crowdfunding is also popular with creators looking to fund their art and individuals raising money for personal or social causes.

Traditional financing methods, such as bank loans, grants or venture capital, don’t work for every business. In these cases, business owners may turn to crowdfunding, meaning they take a community approach.

Anyone interested in your venture can contribute money to support it. In return, backers often receive a return on investment.

For example, kid-safe tool design startup ChompShop used crowdfunding platform Kickstarter to fund its ChompSaw power tool.

Backers were offered rewards like VIP discounts and product bundles in return for supporting the campaign.

Combining an in-demand product, an informative campaign page and community building via email marketing and social media led to success. These factors helped ChompShop reach its $50,000 goal in 23 minutes. By close, the company had raised $1,175,102 from over 5,000 backers.

Crowdfunding platforms and effective marketing have made crowdfunding a popular way for startups to bring ideas to life.

More than 270,000 projects have been successfully funded on Kickstarter alone. Statista research predicts crowdfunding transactions will reach $1.27 billion by 2028.

Before we look at the different crowdfunding approaches, let’s explore some of the benefits that a large group of backers offers beyond raising capital.

The benefits of crowdfunding your business idea

While traditional financial backing provides the funds to achieve your goal, crowdfunding’s strength is in community building. Engaging your network helps you earn loyal supporters who can champion your idea, shape your project and empower long-term success.

Beyond monetary support, here are some of the benefits of crowdfunding your venture:

• Validating your idea. Crowdfunding helps you gauge market interest. A successful campaign can also demonstrate proof of concept to future stakeholders and investors, helping you secure funding that might previously have been unavailable.

• Generating brand awareness. Crowdfunding platforms put your brand and project in front of audiences who may not have found you otherwise. Successful campaigns can also attract attention from media outlets, helping you generate publicity, build recognition and create word-of-mouth buzz that increases your reach.

• Building an audience. Backers become your earliest supporters and brand advocates who help spread your message. Engaging them with campaign updates and rewards helps you build a loyal following and a ready-made customer base come launch time.

• Gathering feedback. Publicly sharing your idea lets you collect feedback to iron out issues before launch. For example, backers might share ideas for improvements or additional features to help you go to market with a more complete solution.

3 popular types of crowdfunding

The right crowdfunding model depends on your project and the return on investment (if any) you want to offer backers.

Here are the three main types of crowdfunding and their best use cases.

1. Donation-based crowdfunding

Donation-based crowdfunding uses social good as a return on investment. It’s a funding model commonly used by nonprofits and social enterprises, allowing backers to donate money because they believe in the cause.

For example, Mulatto Meadows used crowdfunding to give underprivileged and marginalized communities access to horses.

Each donation went toward program costs, operations, fees and upkeep.

Donation-based crowdfunding means you don’t have to worry about rewarding, repaying or giving away shares to backers.

However, without a product or service to sell, campaigns rely solely on the project’s emotional appeal. Therefore, this model is best for charitable, community and social causes.

2. Reward-based crowdfunding

Reward-based crowdfunding involves backers contributing to your goal in exchange for a reward. It’s a popular model for creative startup companies and new product launches.

For example, to crowdfund its 3-in-1 camping system, Space Acacia offered supporters early access to different versions of its product. The higher the pledge, the more feature-heavy the product:

With the right incentives, reward crowdfunding is an effective way for entrepreneurs to assess market interest and engage backers. It also acts as a pre-sale to build an early customer base before a full launch.

3. Equity-based crowdfunding

Equity-based crowdfunding involves giving backers shares in your company. It’s an effective model for startups with high-growth potential, allowing them to raise a large amount of capital.

Attracting equity investors also enables you to build long-term relationships to grow your business.

Investors are committed to your company’s success. They offer expertise and connections to help you improve your offering and reach new markets.

However, giving up equity can mean sharing control with investors and increasing your commitment to stakeholders through reporting and financial returns. It’s important to choose investors who fit your brand’s purpose and mission.

Here’s a summary of the most common crowdfunding models and their best use cases:

7 crowdfunding platforms for your fundraising campaign

Crowdfunding platforms help you raise awareness, receive money and engage your community.

While features and user bases differ, most sites work the same: you submit your new project with a fundraising target and deadline, then campaign for support.

In exchange for hosting your campaign, the crowdfunding site charges you fees. Depending on the site, these might be platform, payment processing or transaction fees.

We’ve included fees in the list below so you can consider them when choosing the best platform for your goals and budget.

1. Kickstarter

Kickstarter is one of the most popular crowdfunding platforms around. Since 2009, the site has helped startups raise over $8.5 billion in pledges.

Kickstarter is a reward-based platform, so it’s best suited to products or services.

In exchange for their pledge, backers are protected by an all-or-nothing guarantee. Meet a goal, and users will receive their funds. Fall short, and backers keep their money.

Successful Kickstarter campaigns often focus on innovative or creative projects. The more novel the project or service, the better the chances of grabbing the attention of reporters and early adopters.

Fees: 5% platform fee and transaction fees of 3% plus $0.30 per pledge for successful projects. Pledges under $10 have a micro-pledge fee of 5% plus $0.08 per pledge.

2. Indiegogo

Like Kickstarter, Indiegogo is a rewards-based crowdfunding site geared toward entrepreneurs and creators. However, it also welcomes nonprofit organizations, allowing you to raise money for charitable causes.

A key benefit of Indiegogo is the ability to choose between flexible or fixed-funding goals. With flexible funding, users keep their money even if they don’t hit 100% of their goal – meaning startups have funds to work on their idea, so long as they fulfill perks.

Indiegogo’s InDemand feature also lets users continue raising money after a fundraising campaign ends. It’s an effective way to build momentum and use crowdfunding to increase production or improve products.

Fees: 5% fee on all funds raised and a transaction fee of 3% plus $0.20.

3. Fundable

Fundable is a crowdfunding website aimed at startups and small businesses.

The platform lets users raise funds in exchange for rewards or equity in two ways:

• Self-Managed. Use Fundable’s platform to run a crowdfunding project and collect pledges.

• Guided Fundraise. The Fundable team creates a pitch deck, researches potential angel investors and venture capitalists and helps users manage fundraising through email outreach and presentation coaching.

If you lack an existing network or the resources to market your idea, Guided Fundraise can introduce your business to willing investors, maximizing your chance of reaching your goal.

Fees: From $179 per month to fundraise.

4. StartEngine

StartEngine is an equity-based crowdfunding website for high-growth startups.

The platform offers two paths:

• Regulation Crowdfunding (Reg CF). Best for new startups that want to raise up to $5 million a year and launch quickly with low upfront costs.

• Regulation A+ (Reg A+). Best for large businesses that want to raise up to $75 million with a registered broker.

Users get access to StartEngine’s community of 1.8 million investors, investment data and a dedicated team to help set up and manage campaigns.

StartEngine has the tools to help secure multi-million dollar investments for businesses with growth potential and significant funds to invest in campaigning.

Fees: 5%-13% commission on closing

5. CrowdStreet

CrowdStreet is a real-estate crowdfunding platform that lets businesses fund construction or commercial property projects.

CrowdStreet’s process is fully managed. If its investment team determines your project is a good fit for its marketplace, you get access to a network of accredited investors to raise passive capital.

Users also receive support from CrowdStreet’s marketing team to help create a webpage and digital marketing plan that reaches target investors.

Additionally, post-investment support helps facilitate communication between users and investors for the duration of the deal.

Fees: Structure varies depending on the deal. Crowdstreet levies a management fee on funds, plus additional fees for servicing, acquisition, marketing and performance.

6. GoFundMe

GoFundMe is a donation-based crowdfunding website for individuals, community initiatives and charitable projects.

GoFundMe is a popular crowdfunding site for personal fundraising because of its simplicity. From memorial tributes to medical emergencies and overcoming financial difficulties, the platform’s tools make it easy to campaign for yourself or others.

However, the platform isn’t built for commercial projects. If you’re launching a new business or product, another platform in this list is likely a better choice.

Fees: 2.9% transaction fee, plus $.030 on payments.

7. Patreon

Patreon is a crowdfunding platform for digital creators such as podcasters, musicians, writers and artists.

Unlike other crowdfunding websites, Patreon is subscription-based, allowing you to generate recurring revenue for your project.

Its tools let you create paid membership plans, giving fans exclusive perks.

For example, a podcaster might create bonus episodes or behind-the-scenes content for Patreon subscribers.

Creators can upload videos, create forums, publish newsletters or host livestreams for members.

By providing gated content, users can incentivize membership and reward fans for their support while raising funds to manage your project. At the same time, they can build an engaged community that helps grow their brand.

Fees: 5%, 8% or 12% of your income, depending on the plan, plus processing fees that vary depending on the payment method (e.g., PayPal, Mastercard or American Express).

Choosing a crowdfunding website

Your project and crowdfunding model choice will help steer you toward the right platform for your goals.

Before committing, evaluate each option to ensure it has what you need to run a successful campaign.

Here are some questions to ask when choosing a crowdfunding website:

• Does the platform attract the right type of backers to support my project?

• Does it have positive reviews and a good track record of successful campaigns?

• Are the fees affordable?

• Does it have tools for campaign creation (e.g., page templates)?

• Can I track campaign performance and referral sources?

• Does it integrate with social media and email marketing platforms for sharing?

• What level of customer support is available?

• Does it include self-support resources (e.g., user guides and a community forum)?

The solution that matches your objectives, resources and audience will give you the best chance of reaching your fundraising target.

5 tips for effective crowdfunding

The right crowdfunding website provides the platform to promote your crowdfunding. However, the key to success is to connect with and engage the right people.

Here are five tips to help you sell your project and hit your funding target.

1. Set a clear, achievable goal

Start by setting a clear goal for your crowdfunding campaign. There are two important questions to answer here:

• What are you using the funds for?

• How much money do you need to reach your goal?

A goal that addresses both questions will show potential donors (and, in some cases, platforms) you have a realistic plan.

It also ensures you ask for the right amount of money. Asking for too much might prove daunting for backers while asking for too little can leave you with less than you need to fulfill promises.

When estimating your costs, include all project expenses. For example:

• Manufacturing expenses

• Platform fees

• Marketing costs

• Shipping and packing costs

• Taxes

Accurate costs will help you set a clear fundraising target to bring your project to life.

Keep your target achievable by focusing on the amount you need for a minimal-viable product (MVP). You can raise additional funds for enhancements through stretch goals (unofficial goals beyond your project target).

For example, say you need $20,000 to create your final complete product with additional colors, styles and accessories. However, you only need $10,000 to launch the basic version. Setting your campaign goal for $10,000 gives you a realistic objective to aim for.

2. Build awareness before launch

Most of the work for your crowdfunding campaigns happens pre-launch. According to Indiegogo, campaigns that reach 30% of their goal in the first two days are more likely to exceed their crowdfunding goal.

Rallying fans before launch day allows you to build momentum early and create social proof, giving potential backers confidence that your idea is on track for success.

Find early supporters by tapping into your network. Think about potential backers as separate groups.

• Immediate network. Family members, friends and close colleagues.

• Community. Current and previous colleagues and professional acquaintances with shared interests.

• Target audience. Existing customers, early adopters and potential backers your project engages or solves a problem for.

Keeping groups separate early on helps you tailor your messaging strategy to personalize outreach.

For example, an email sales pitch to a friend might focus on your personal relationship. However, an overly familiar approach might not work with a stranger who wants to know how your project improves their lives.

Create an email list for each group and develop a plan to contact them before launch. Here’s how your pre-launch sequence might look:

• 60 days before launch. Send personalized emails introducing your project.

• 30 days before launch. Let contacts know how they can help your campaign.

• 14 days before launch. Encourage contacts to share your project on social media.

• 1 day before launch. Send out the campaign link.

• Launch day. Remind contacts why their support is important and thank those who have contributed.

Email marketing software like Campaigns by Pipedrive can help you segment your list so each group receives the right message.

It also lets you build segments by engagement. For example, you can group people by how often they open your emails and click your links. Over time, this can help you build a list of top supporters who can help spread your crowdfunding campaign.

3. Craft a compelling campaign story

Facts and figures are essential for showing potential investors you have a viable product, but storytelling is what brings your project to life.

As the old saying goes, facts tell, but stories sell.

Creating a pitch that connects with backers on a human level communicates value, triggers emotion and inspires action.

Develop a story about your brand and project that answers the why and how of your fundraiser.

• Why does your project exist (what problem does it solve)?

• How does it benefit your audience?

Take Unistellar’s Fundable pitch for its consumer telescope:

Unistellar makes potential backers care about its product by highlighting flaws in the competition: “Optical telescopes are not powerful enough to observe the many objects of the sky, such as galaxies, nebulae, and comets.” “They are also very complicated to set up, install and use.”

They also turn features into benefits, helping readers see how the product can fit into their lives: “The integrated hardware and image processing software allows users to enjoy 200 times more targets without being an expert.”

Research how successful crowdfunding campaigns use storytelling to grab attention as inspiration for your own narrative.

Focus on creating a story that is:

• Relevant to your audience’s pain points and emotional triggers

• Unique to your business or product

• Clear and honest (don’t be afraid to talk about challenges and mistakes)

Combine compelling copy with eye-catching images and video to make your story shareable. A story worth retelling will help spread your message and reach audiences beyond your network.

4. Create meaningful incentives

If you want people to back your crowdfunding campaign, it helps to give them something of value in return.

Perks and rewards give potential funders a tangible reason to contribute. Additionally, they’re an effective way to engage and attract an audience.

For example, HappyWorks rewarded customers for backing its crowdfunding campaign early by offering its Thermometer at tiered early bird prices.

Making a limited number available incentivized backers to act quickly to avoid missing out on a big discount.

Keep rewards relevant to your project. For example, a podcaster might offer exclusive bonus or extended episodes. Alternatively, a startup might invite a small number of backers to its launch party.

Consider co-creating perks with your pre-launch supporters. For instance, animal sanctuary Edgar’s Mission ran a workshop with supporters before its crowdfunding campaign.

The workshop helped the non-profit design rewards to appeal to a wide range of donors, including special recognition for small donors and paddocks named after high-tier backers.

Offering perks at different levels (e.g., $10 to $100) makes your project accessible to more people, allowing you to make steady progress toward your goal.

5. Keep your audience engaged at every stage

A well-managed backer experience is crucial to maintaining momentum and reaching new audiences. Backers are your biggest advocates, so it’s crucial to keep them engaged.

Regular updates on progress, milestones and challenges (as well as swift answers to questions) keep fans invested. You can also share updates on social media and encourage backers to spread the word with their networks to grow your audience.

As with your pre-launch build, email is one of the most effective ways to keep people in the loop.

As your audience grows, consider using a customer relationship management (CRM) platform to streamline engagement.

A tool like Pipedrive’s CRM stores all your contact data in one place and lets you split customers into groups (e.g., backers and potential backers) to effectively target your marketing.

By tracking their activity across your campaign, you can send relevant content at every stage.

Pipedrive’s automated email tools simplify this task, allowing you to send emails automatically whenever you reach a significant milestone.

You can also set up notifications to alert you to specific events (e.g., receiving a large donation or inquiry) so you can respond personally and build relationships with your audience.

Maintain contact with backers even after your crowdfunding campaign ends. Sharing updates on product development and your business journey will help you build a loyal customer base to support your next project.

Final thoughts

Crowdfunding is an effective way to start or grow your business. With a strong campaign, you can raise the funds you need to get your idea off the ground and establish an engaged community to empower future success.

Use Pipedrive’s powerful tools to personalize marketing and manage relationships during your crowdfunding campaign and beyond. Try it today with a 14-day free trial.