What is Crowdfunding?
Updated: Aug 15, 2022
The word crowdfunding is a combination of the words ‘crowd’ and ‘funding’. The term was first coined by author Ralph Merkle in his 1999 book 'Crowdsourcing: How the Power of the Crowd Is Driving the Future of Business'.
With crowdfunding, a business can raise money from the general public to help fund an idea or product. This can be done through online platforms like Kiva, iFundWomen, and Kickstarter. Crowdfunding can be a great way for Black women business owners to raise the funds they need to grow and scale their businesses. We explain more about what crowdfunding is and why it is beneficial in this article.
What is crowdfunding?
Crowdfunding is a way for individuals to raise money for projects or ventures. It’s often used to help start-ups, but it can also be used as a method of raising funds for charitable causes and other projects.
To leverage crowdfunding, an entrepreneur will set up web pages describing their projects, such as a book to be published or a record album they want to produce. They then ask people who are interested in contributing toward the page’s goal to contribute money through an online payment system (e.g., PayPal).
There are a number of funding options available to those who want to crowdfund projects. Some allow for just one-time contributions, while others offer recurring pledges—like monthly donations that continue until the project is finished. There are also crowdfunding platforms with multiple tiers of reward tiers, allowing users to contribute more money and get more perks in return. The choice is really yours on which funding option is more ideal for you.
What makes crowdfunding unique?
Traditionally, if you want to launch a new product or establish a business, you would need to gather your prototypes, market research, and business plan, then pitch your concept to a select group of well-off people or organizations. These funding sources consist of only but a few major wealthy players, including banks, angel investors, and venture capital firms. This method of fundraising can be compared to a funnel, with you and your pitch at one end and your target audience of investors at the other. You lose time and money if you don't direct that funnel at the proper firm or investor at the right time.
Crowdfunding, on the other hand, makes it much easier for you to spread the word about your opportunity and give potential investors more methods to support the expansion of your company, ranging from investing thousands in exchange for equity to making a $50 contribution in exchange for a first-run product or other benefits. You won't have to spend months on end combing through your personal network, screening possible investors, and investing your own time and money to get in front of them.
What are the types of crowdfunding?
This is the most common form of crowdfunding. It's used by companies, charities and individuals who want to raise money for a project or idea. This type of funding is typically used to pursue projects that have limited returns (think: movies) or where investors don't expect a return (like when someone starts a business). The rewards are usually non-financial (often in the form of a product or service), although some platforms allow it if the project's creator agrees to offer rewards as part of their pitch.
Equity-based crowdfunding exists to allow investors to back companies with the hopes of making a profit down the line. It's also known as crowd investing because the investors are essentially buying shares in the company. This type of funding is usually reserved for startups that have already been incorporated and are looking to grow their business
Donation-based crowdfunding, broadly speaking, refers to any campaign where there is no monetary reward for the investors or donors. Fundraising efforts based on donations are frequently used for nonprofits, charities, and medical expenses.
What are the benefits of crowdfunding?
When you need to start a new project, crowdfunding can help you find funding. If you want to start your own business, but don't have enough money to get started, crowdfunding may be the solution. It's also useful when you want people to support the launch of something new—like an album or movie—or if you'd like them to help fund an event that would benefit everyone involved.
You can also use your crowdfunding campaign as a marketing tool to spread the word about your business and get potential leads from the jump. If things go well during your campaign on your selected crowdfunding platform, then there's no doubt that people will be interested in knowing more about what made it so successful...and why not use this opportunity? You'll most likely get some free press opportunities that you can leverage for your brand.
Crowdfunding is a great way to get your idea out into the world, but it’s important to choose the right platform for your project. Kiva is a great platform we partner with to help Black women-owned businesses get access to the funds they need to grow their businesses through crowd-funded lending.
If you are a Black woman entrepreneur who's looking to learn about where to begin on fleshing out your business concept before you raise capital, enroll in the Blaze Business Intensive course for entrepreneurs today! Learn more by clicking the button below.